Under the Revenue Act of 1926 the taxpayer is entitled, in the case of oil and gas wells, to deduct from gross income an allowance for depletion. The relevant sections of the act are copied in the margin. The present litigation calls for decision as to the total allowance permitted and its apportionment between lessor and lessee where the income is derived from operation under an oil and gas lease.
During 1925, 1926 and 1927 the respondent, as assignee of the lessee named in an oil and gas lease, extracted substantial quantities of oil. By the terms of the lease and the assignment it was obligated to pay royalties in cash or in kind, totalling one-quarter of the oil extracted. The respondent claimed that the gross proceeds of all the oil produced should form the basis for the computation of the allowance for depletion granted by section 204(c)(2), but the petitioner ruled that the deduction should be limited to 27 1/2 per cent. of gross production less royalties paid. The Board of Tax Appeals sustained the ruling. The Circuit Court of Appeals reversed the Board. The case is here on writ of certiorari.
The petitioner construes section 204(c)(2) in pari materia with section 234(a) (8), and asserts the percentage deduction permitted by the former is subject to the requirement of equitable apportionment between the lessor and lessee required by the latter. The respondent urges that section 204(c)(2) is an independent and complete provision, to be applied without reference to section 234(a)(8), and that to attempt to apportion the allowance granted by section 204(c)(2) in the manner indicated by section 234(a)(8) would violate the plain terms of the statute.
Reference to the structure of the successive income tax laws will aid in a solution of the problem. The Revenue Act of 1916 imposed an income tax by title 1. It divided the provisions as to tax into two parts, part 1 on individuals, and part 2 on corporations. In each part the statute first lays the tax and in a subsequent section grants certain deductions, those enumerated in section 5 of part 1 being available to individuals, and those specified in section 12 of part 2 to corporations. Both sections include a reasonable allowance for depletion in the case of oil and gas wells. In the drafting of the Revenue Act of 1918 a new arrangement of the subject-matter was adopted. Title 1 is composed of definitions, title 2 treats of income tax. Part 1 of this title consists of general provisions applicable alike to individual and corporate taxpayers. Sections under this part define taxable years and dividends, and section 202 prescribes the 'basis for determining gain or loss,' but makes no reference to depletion of mines, timber, or oil and gas wells. Additional sections have to do with inventories, net losses, and other general matters. Part 2 levies the tax on individuals, defines net and gross income, and in section 214 specifies the deductions allowed from gross income. The opening sentence of subsection (a)(10) is: 'In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted.'
Then follow two provisos, one directing how cost shall be ascertained in the case of properties acquired prior to March 1, 1913, and the other allowing an alternative method of calculating depletion upon the basis of discovery value of mines and oil and gas wells. The paragraph ends with the sentence: 'In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.' In part 3, levying the corporation tax, section 234(a)(9) allows a deduction for depletion in the identical phraseology employed with respect to individual taxpayers in section 214(a)(10).
The same method was followed in the Revenue Act of 1921. The general provisions contain no reference to depletion, but under parts 2 and 3 of title 2 the tax is fixed for individuals and corporations and the allowable deductions from gross income are set forth. The paragraphs of the prior act as to depletion of oil and gas wells are literally re-enacted, but, there is inserted in section 214(a)(10) as to individuals and section 234(a)(9) as to corporations, an additional proviso with respect to discovery value.