does not differ from the deduction for depreciation." United States v. Ludey, 274 U.S., at 303. In short, the purpose of the depletion deduction is to permit the owner of a capital interest in mineral in place to make a tax-free recovery of that depleting capital asset.

Although the sentence in § 23 (m) that "In the case of leases the deductions shall be equitably apportioned between the lessor and lessee" presupposes "that the deduction may be allowed in other cases" (Palmer v. Bender, 287 U.S. 551, 557 [Ct. D. 641, C.B. XII-1, 235 (1933)]), the statute "must be read in the light of the requirement of apportionment of a single depletion allowance" (Helvering v. Twin Bell Oil Syndicate, 293 U.S. 312, 321 [Ct. D. 905, C.B. XIV-1, 253 (1935)]), for two or more persons "cannot be entitled to depletion on the same income" (Commissioner v. Southwest Exploration Co., 350 U.S. 308, 309). It follows that if petitioners are entitled to a depletion allowance on the amounts earned under their contracts, the amounts allowable to the landowners for the depletion of their coal deposits would be correspondingly reduced.

Dealing specifically with the problem of what interests in mineral deposits were permitted a deduction for depletion under the practically identical predecessors of §§ 23 (m) and 114, this Court said in Palmer v. Bender, 287 U.S. 551, 557: "The language of the statute is broad enough to provide, at least, for every case 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." The Court further said that the deduction is not "dependent upon the particular legal form of the taxpayer's interest in the property to be depleted, [and that] [i]t is enough if ... 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."" Ibid. [Emphasis added.]. The Court went on to hold that lessees of oil producing properties, by reserving from an assignment a royalty of "one-eighth of all the oil produced and saved," retained an economic interest in the oil in place and were therefore entitled to an allowance for depletion against their gross income from that interest.

Five years later, in 1938, the Court in Helvering v. Bankline Oil Co., 303 U.S. 862, reaffirmed the test laid down in Palmer and added: “But the phrase 'economic interest' is not to be taken as embracing a mere economic advantage derived from production, through a contractual relation to the owner, by one who has no capital investment in the mineral deposit." 303 U.S., at 367. Apply ing that principal, the Court held that a processor who, by contracts with the owners of gas and oil wells, had acquired the right to take wet gas from the well heads and to extract and sell the gasoline therefrom, paying the well owners a percentage of the proceeds of such sales, had not acquired an economic interest in the depleting gas in place but only an economic advantage to be derived from the processing operations, and that therefore the income from those operations was not subject to the depletion deduction.

The principles declared in the Palmer case have been recognized and applied by every subsequent decision of this Court that has treated with the subject. Helvering v. Bankline Oil Co., 303 U.S. 362, 367, literally adopted the language of the Palmer case upon the point.

In Helvering v. O'Donnell, 303 U.S. 370, 371 [Ct. D. 1324, C.B. 1938-1, 337] it was said: "The question is whether respondent had an interest, that is, a capital investment, in the oil and gas in place. Palmer v. Bender, 287 U.S. 551, 557; Helvering v. Twin Bell Oil Syndicate, 293 U.S. 312, 321; Thomas v. Perkins, 301 U.S. 655, 661 [Ct. D. 1237, C.B. 1937-1, 162]; Helvering v. Bankline Oil Co., supra."

Helvering v. Elbe Oil Land Development Co., 303 U.S. 372, 375-376, declared that "The words gross income from the property' as used in the statute governing the allowance for depletion, mean gross income received from the operation of the oil and gas wells by one who has a capital investment therein-not income from the sale of the oil and gas properties themselves."

Anderson v. Helvering, 310 U.S. 404, 408-409, repeated the statement last quoted. In Kirby Petroleum Co. v. Commissioner, 326 U.S. 599, 603, the Court said: The test of the right to depletion is whether the taxpayer has a capital investment in the oil in place which is necessarily reduced as the oil is extracted."

In Burton-Sutton Oil Co. v. Commissioner, 328 U.S. 25, 32 [Ct. D. 1674, C.B. 1946-1, 237], the Court said: "It seems generally accepted that it is the owner of a capital investment or economic interest in the oil in place who is entitled to the depletion."

Commissioner v. Southwest Exploration Co., 350 U.S. 308, 313, reannounced substantially the rule declared in the Palmer case. It said "that a taxpayer is entitled to depletion where he has (1) 'acquired, by investment, any interest in the oil in place,' and (2) secured by legal relationship income derived from the extraction of the oil, to which he must look for a return of his capital.' These two factors, usually considered together, constitute

the requirement of 'an economic interest.'"

In his first regulations prescribed under the Internal Revenue Act of 1939, the Commissioner adopted almost literally the language we have quoted from Palmer and Bankline as the tests to be administratively applied in determining what interests in mineral deposits are entitled to the depletion allowance. See Treas.

Reg. 103, § 19.23 (m)-1, August 23, 1939. That language, with immaterial changes, has remained in the regulations ever since. During the years here involved, 1942 through 1950, the regulation in force was Treas. Reg. 111, § 29.23 (m)-1, which, in pertinent part, provides:

"Under [the provisions of §§ 23 (m) and 114] the owner of an economic interest in mineral deposits or standing timber is allowed annual depletion deductions. An economic interest is possessed in every case in which the taxpayer has acquired, by investment, any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the severance and sale of the mineral or timber, to which he must look for a return of his capital. But a person who has no capital investment in the mineral deposit or standing timber does not possess an economic interest merely because, through a contractual relation to the owner, he possesses a mere economic advantage derived from

production...

Such are the interests that are permitted a deduction for depletion by the statutes as consistently interpreted by this Court and by the Commissioner. Petitioners do not dispute that these are the controlling principles, but rather they contend that they come within those that allow the deduction. They argue that by their contracts to mine the coal, and particularly by contributing their equipment, organizations and skills to the mining project as required by those contracts, they, in legal effect, made a capital investment in, and thereby acquired an economic interest in, the coal in place, which was depletable by production, and that they are therefore entitled to take the deduction against their gross income derived from those mining operations.

We take a different view. It stands admitted that before and apart from their contracts, petitioners had no investment or interest in the coal in place. Their asserted right to the deduction rests entirely upon their contracts. Is there anything in those contracts to indicate that petitioners made a capital investment in, or acquired an economic interest in, the coal in place, as distinguished from the acquisition of a mere economic advantage to be derived from their mining operations? We think it is quite plain that there is not.

By their contracts, which were completely terminable without cause on short notice, petitioners simply agreed to provide the equipment and do the work required to strip mine coal from designated lands of the landowners and to deliver the coal to the latter at stated points, and in full consideration for performance of that undertaking the landowners were to pay to petitioners a fixed sum per ton. Surely those agreements do not show or suggest that petitioners actually made any capital investment in the coal in place, or that the landowners were to or actually did in any way surrender to petitioners any part of their capital interest in the coal in place. Petitioners do not factually assert otherwise. Their claim to the contrary is wholly based upon an asserted legal fiction. As stated, they claim that their contractual right to mine coal from the designated lands and the use of their equipment, organizations and skills in doing so, should be regarded as the making of a capital investment in, and the acquisition of an economic interest in, the coal in place. But that fiction cannot be indulged here, for it is negated by the facts.

To recapitulate, the asserted fiction is opposed to the facts (1) that petitioners' investments were in their equipment, all of which was movable-not in the coal in place; (2) that their investments in equipment were recoverable through depreciation-not depletion; (3) that the contracts were completely terminable without cause on short notice; (4) that the landowners did not agree to surrender and did not actually surrender to petitioners any capital interest in the coal in place; (5) that the coal at all times, even after it was mined, belonged entirely to the landowners, and that petitioners could not sell or keep any of it but were required to deliver all that they mined to the landowners; (6) that petitioners were not to have any part of the proceeds of the sale of the coal, but, on the contrary, they were to be paid a fixed sum for each ton mined and delivered, which was, as stated in Huss, agreed to be in "full compensation for the full performance of all work and for the furnishing of all [labor] and equipment required for the work"; and (7) that petitioners, thus, agreed to look only

to the landowners for all sums to become due them under their contracts. The agreement of the landowners to pay a fixed sum per ton for mining and delivering the coal "was a personal covenant and did not purport to grant [petitioners] an interest in the [coal in place]." Helvering v. O'Donnell, 303 U.S. 370, 372. Surely these facts show that petitioners did not actually make any capital investment in, or acquire any economic interest in, the coal in place, and that they may not fictionally be regarded as having done so.

"Undoubtedly, [petitioners] through [their] contracts obtained an economic advantage from [their] production of the [coal], but that is not sufficient. The controlling fact is that [petitioners] had no interest in the [coal] in place." Helvering v. Bankline Oil Co., 303 U.S., at 368. Of course, the parties might have provided in their contracts that petitioners would have some capital interest in the coal in place, but they did not do so-apparently by design. Instead, petitioners simply entered into contracts, terminable without cause on short notice, with the owners of coal-bearing lands to provide the equipment and do the work required to strip mine and deliver coal from those lands, as independent contractors for fixed unit prices. "[Petitioners thus] bargained for and obtained an economic advantage from the [mining] operations but that advantage or profit did not constitute a depletable interest in the [coal] in place" (Helvering v. O'Donnell, 303 U.S., at 372), and having "no capital investment in the mineral deposit which suffered depletion, [petitioners are] not entitled to the statutory allowance" (Helvering v. Bankline Oil Co., 303 U.S., at 368).

The judgments must therefore be Affirmed.

SECTION 114.-BASIS FOR DEPRECIATION AND
DEPLETION

REGULATIONS 111, SECTION 29.114-1: Basis for

allowance of depreciation and depletion.

Depletable interest under a coal stripping contract which required taxpayer to turn over all coal mines to the landowners. See Ct. D. 1836, page 37.

PART III

ALCOHOL TAX RULINGS AND DECISIONS

SUBPART A.-RULINGS AND DECISIONS UNDER THE INTERNAL REVENUE CODE OF 1954

Rulings and decisions published in Part III, Subpart A, of the Internal Revenue Bulletin are based on the application of provisions of the Internal Revenue Code of 1954 and, unless otherwise noted therein, are published without consideration as to any application of the provisions of the Internal Revenue Code of 1939, the Federal Alcohol Administration Act, or other public laws.

SECTION 5241.-SUPERVISION OF OPERATIONS

26 CFR 170.189: Application.

Dates to be shown upon Form 2323, Mingling of Distilled Spirits. See Rev. Proc. 59-13, page 44.

26 CFR 225.417c: Application for consolidation.

Dates to be shown upon Form 2323, Mingling of Distilled Spirits. See Rev. Proc. 59-13, page 44.

26 CFR 225.564: Date of receipt in ware

house to be shown on withdrawal

application or permit.

Dates to be shown upon Form 2323, Mingling of Distilled Spirits. See Rev. Proc. 59-13, page 44.

(43)

PART V

ADMINISTRATIVE AND MISCELLANEOUS MATTERS

26 CFR 601.301: Imposition of taxes, qualification requirements, and regulations.

(Also Part III-A, Section 5241; 170.189, 225.417c, 225.564.)

Rev. Proc. 59-13

Proprietors of internal revenue bonded warehouses are requested by the Internal Revenue Service to show in section 1, item 9(e) of Form 2323, Mingling of Distilled Spirits, the date each lot of distilled spirits listed therein was received in the warehouse.

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to inform proprietors of internal revenue bonded warehouses and others concerned of the need for showing additional information on Form 2323, Mingling of Distilled Spirits.

SEC. 2. BACKGROUND.

In order to avoid unnecessary delay in processing various applications which require that reference be made to the deposit forms maintained by storekeeper-gaugers assigned to internal revenue bonded warehouses, section 225.564 of the Federal Warehousing of Distilled Spirits Regulations requires proprietors to show on such applications, in addition to other required information, the date the spirits involved were deposited in the warehouse.

The current revision of Form 2323 does not make provision for reporting the date the spirits were received in the warehouse but as the storekeeper-gauger to whom the application is submitted must locate the deposit forms for such spirits, the furnishing of the date of deposit would reduce delay, in processing the application. SEC. 3. INTERIM METHOD.

Pending revision of Form 2323 proprietors of internal revenue bonded warehouses are requested to show, in section I, item 9(e) of the form, the date each lot of spirits listed therein was received in the warehouse.

SEC. 4. INQUIRIES.

Inquiries regarding this Revenue Procedure should refer to the number thereof and be addressed to the appropriate Assistant Regional Commissioner, Alcohol and Tobacco Tax.