c10:NOS. 130 AND 131

Mr. Justice Rutledge,
dissenting:
In my opinion Article 23 (m)-10 (c) is not a reasonable exercjse of the rule-making authority conferred by § 23. By that section Congress provided: “In computing net income there shall be allowed as deductions ... a reasonable allowance for depletion . . . according to the peculiar conditions in each case . . . under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary.” Revenue Act of 1936,49 Stat. 1648. (Emphasis added.) Since adoption of the Revenue Act of 1918 this authority has been executed in part by Regulations 45, Article 215 (c) and its successors, which permit the deduction in years when advance royalties are received. It is not urged, nor could it well be, that the deduction in such circumstances is not one comprehended by the statute. In making that mandate Congress clearly did not intend the privilege to be granted merely on terms which would defeat its operation. Yet this, in my judgment, is exactly the effect of Article 23 (m)-10 (c).
In requiring that “a corresponding amount must be returned as income for the year in which the lease expires, terminates, or is abandoned,” the regulation piles up as “income” for a single year the sum of all the deductions taken in the previous ones. Wholly apart from whether in theory or in fact “income” can be said to be realized by thus piling up the deductions, this requirement imposes risks and burdens upon taking the deduction heavier than any advantage to be gained from it and therefore prohibitive.
The consequences hardly could be illustrated better than by the case of Bessie P. Douglas. By taking the deduction during the eight years when she received advance royalties, 1929 to 1936 inclusive, she saved a total in taxes of about $7,000. Then her lease was canceled by the lessee. And in 1937, a year in which she received no cash return from the lease, her tax liability was increased by about $26,500 for having taken the deduction in previous years. She was thus forced to pay approximately $19,500 more in taxes than if she had never taken it.
The regulation’s destructive effect bears on all who receive advance royalties, not merely on those who actually must return accumulated prior deductions as “income” in a single year. The taxpayer must take the deduction, if at all, as his royalties accrue, not later as the ore is removed. The system of annual accounting is said to require this. Cf. Burnet v. Thompson Oil & Gas Co., 283 U. S. 301, 306; Burnet v. Sanford & Brooks Co., 282 U. S. 359. Yet it is said also to require that the deductions be telescoped into “income” for a single year in which the returns they represent are not received, and with an effect in tax burden, by the mere fact of the aggregation, far beyond any which would be imposed if the deductions never had been authorized or taken. Hence all who receive advance royalties are faced with the choice of taking the deductions and thus risking this pyramiding of “income,” against the chance the lessee will some day deplete the property, or of foregoing the deductions altogether.
It is true the taxpayer may receive an economic benefit in the release of his ore from the right of another to remove it. And by the regulation’s requirement that he restore to his capital account an amount equal to the sum of the accumulated deductions, he also receives a possible future tax benefit in larger deductions allowable if and when he sells or leases the minerals again. But these benefits are wholly uncertain. In fact, release of his ore from the right of removal gives him not income then realized in cash to the amount of accumulated deductions, but unsold ore in the ground which the lessee has found it unprofitable to remove although he has paid for it. The only contingency on which the taxpayer really benefits by the deductions is in the event the lessee ultimately does deplete the property. But it is difficult to believe Congress deliberately extended the opportunity for deduction to lessors whose property is not in fact depleted by the lessee’s operations only to authorize the Commissioner to nullify and penalize that opportunity. This the regulation does, in effect, when it imposes on one who takes the deduction the risk, on a contingency beyond his control, of having to pay in taxes several times the amount of the deductions on the happening of the contingency.
Nor is the regulation reasonably adapted to recoupment of the losses in revenue, wholly proper when incurred but which later events require to be made up. On the contrary, it perverts recoupment by pyramiding income spread in receipt over many years into “income” received in a single, entirely different one. And in a day when the tax rate mounts more often than yearly the skyrocketing effect of the process operates with wholly incalculable effect on the taxpayer, who it will be noted has no control over the contingency which brings it into play.
A regulation which would require the taxpayer to pay the taxes deducted for the prior years together with the usual interest and penalties would be harsh enough in discouragement of taking the deduction. In effect it would penalize one who rightfully takes an allowance as much as one who wrongfully does so. But, even so, this would bear some semblance of reasonable relation to recouping the losses sustained by the revenue and to allocating income to the year in which it is received. However, to amalgamate the deductions into “income” for a single year, in which none of it is actually received, is an entirely different thing. It is to make of the so-called scheme of deductions a snare for the unwary who violate no law but comply with it fully; and at the same time to strain the theory of annual accounting beyond any reasonable application.
The regulation, therefore, both effectively nullifies a privilege which Congress provided the taxpayer shall have and reaches farther than any reasonable recouping provision should go. It is no answer to say deduction is a privilege which Congress need not have extended, or having extended can qualify out of existence. The question is whether Congress did, or authorized the Commissioner to do, the latter. Its language, its prior treatment of the problem and its treatment of a related problem in the identical section of the Revenue Act all point to the conclusion it did neither.
Other questions are raised on the record. It is unnecessary to consider them. In my opinion Congress would not have nullified its grant of the privilege to take “a reasonable allowance for depletion” by enacting Article 23 (m)-10 (c) to make exercising it so hazardous, capricious, and unjust in consequence. That being true, I do' not think authority was delegated to the Commissioner to adopt or to the Secretary to approve it. I would reverse the judgment.
Mr. Justice Murphy joins in this opinion.
Compare, e. g., 26 U. S. C. §§ 11-23, and see also 4 Mertens, Law of Federal Income Taxation (1942) § 24.64.
Compare Rev. Act of 1913 § II (G) (b); Rev. Act of 1916 § 5 (a) (Eighth) (b) with Rev. Act of 1918 § 234 (a) (9); Rev. Act of 1936 § 23 (m).
Cf. note 2 supra.
The uncertain career of Article 23 (m)-10 (c), adverted to in the Court’s opinion, offers no support for Congressional acquiescence in the Commissioner’s position before 1932 and only doubtfully suggests it after that date. In this case the nullifying effect of the limitation upon the privilege granted prevents removal of that doubt.

Passage view · GavelSight