The ultimate question presented by this case is whether petitioner is entitled to a deduction in its 1935 income tax return for percentage depletion under § 114(b)(4) of the Revenue Act of 1934, 48 Stat. 680, 26 U.S.C.A. Int.Rev.Code § 114(b)(4), which allowed the deduction from gross income in the case of mines, etc., of specified percentages of gross income, but not to exceed 50% of the net income computed without regard to depletion allowance, and required that:
'A taxpayer making his first return under this title (chapter) in respect of a property shall state whewther he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion, and the depletion allowance in respect of such property for such year shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for such year shall be computed without reference to percentage depletion. The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer, * * *.'
The pivotal question is whether petitioner's income tax return for 1934 or for 1935 was the first return in respect of its mining property within the meaning of § 114(b)(4). During the tax year 1934 petitioner's copper mine was closed. In its 1934 income tax return petitioner reported gross income from the sale of one mined the previous year, but the deductions, most of which were attributed to 'Shutdown Expense', were such that there was no net income. Petitioner claimed no depletion allowance in the return depletion allowances prior to 1933 had exhausted petitioner's cost basis-and made no statement with regard to percentage depletion. In 1935 petitioner derived a net profit from the operation of its mine and claimed a deduction for percentage depletion, stating that it had elected percentage depletion for the future in its 1933 return, filed under § 114(b)(4) of the Revenue Act of 1932, 47 Stat. 169, 26 U.S.C.A. Int.Rev.Acts, page 519. The Commissioner disallowed the percentage depletion deduction for 1935, ruling that under § 114(b)(4) of the 1934 Act petitioner's 1934 return was its first return in respect of its mining property and that its failure to make an affirmative election in that return constituted an election to compute depletion thereafter without reference to percentage depletion. Accordingly, the Commissioner made a deficiency determination which the Board of Tax Appeals sustained. The Court below affirmed. 2 Cir., 125 F.2d 657. We granted certiorari because of an asserted conflict with the decision in Pittston-Duryea Coal Co. v. Commissioner, 3 Cir., 117 F.2d 436.
Section 114(b)(4) required petitioner to elect in its 'first return under this title (chapter) (income tax) in respect of a property' whether its depletion allowance was to be computed with or without regard to percentage depletion, and the method thus chosen became binding for the subsequent taxable years. Petitioner's 1934 return falls within the exact statutory definition of 'first return'. It was the first return filed under the 1934 Act, and it was 'in respect of' the mining property since it listed items of gross income and deductions arising out of that property. Petitioner's failure there to state its election foreclosed any subsequent claim to percentage depletion. This has been the administrative interpretation. Article 23(m)-5 of Regulations 86. We think this regulation is binding because not only is it practically compelled by the words of § 114(b)(4), but also it is a reasonable interpretation, which, as will be shortly pointed out, is fair and workable in its operation.