Ludey brought this suit in the Court of Claims to recover an amount exacted as additional taxes for 1917, under the income and excess profits provisions of the Revenue Act of 1916 (Act Sept. 8, 1916, c. 463, tit. 1, 39 Stat. 756-759), as amended by the Revenue Act of 1917 (Act Oct. 3, 1917, c. 63, 40 Stat. 300, 329). The tax was assessed on the alleged gain from a sale in 1917 of oil-mining properties which had been owned and operated by him for several years. The Commissioner of Internal Revenue determined that there was a gain on the sale of $26,904.15. Ludey insists that there was a loss of $14,777.33. The amount sued for is the tax assessed on the difference. Whether there was the gain or the loss depends primarily upon whether deductions for depletion and depreciation are to be made from the original cost in determining gain or loss on sale of oil-mining properties. The question is one of statutory construction or application. The Court of Claims entered judgment for the plaintiff. 61 Ct. Cl. 126. This court granted a writ of certiorari. 271 U.S. 651, 46 S.C.t. 473, 70 L. Ed. 1132.
The properties consisted, besides mining equipment, in part of oil land held in fee, in part of oil-mining leases. The aggregate original cost of the properties was $95,977.33. 33Of this amount $30,977.33 was the cost of the equipment used in the business; $65,000 the cost of the oil reserves. The 1917 sale price was $81,200. For the purpose of determining the cost of the properties sold in 1917 the Commissioner deducted from the original cost $10,465.16 on account of depreciation of the equipment through wear and tear, and $32,258.81 on account of depletion of the reserves through the taking out of oil by the plaintiff, after March 1, 1913. There was no dispute of fact concerning the correctness of the estimates upon which these deductions were made. The finding of the depletion was in accordance with the method of computation employed by the Bureau of Internal Revenue, and there was no objection specifically to the method of computation. But Ludey insisted that the amount of depletion, if any, could not be found or stated as a fact, since, in the nature of the case, it was impossible to determine how much oil was recoverable, either when he acquired the properties or when he disposed of them. The finding of the depreciation was, likewise, in accordance with the method of computation employed by the bureau; and there was no objection to the method of computation. But Ludey insisted also in respect to depreciation that the property was, as a matter of law, unchanged in character and quantity throughout the period of operation.
Until 1924, none of the Revenue Acts provided in terms that, in computing the gain from a sale of any property, a deduction shall be made from the original cost on account of depreciation and depletion during the period of operation. But ever since March 1, 1913, the Revenue Acts have required that gains from sales made within the tax year shall be included in the taxable income of the year, and that losses on sales may be deducted from gross income. And each of the acts has provided that, in computing the taxable income derived from operating a mine, there may be made a deduction from the gross income for the depreciation and that some deduction may be made for depletion. The applicable provisions of section 5(a) of the Revenue Act of 1916 (Comp. St. § 6336e) concerning deductions to be allowed in computing net income are these:
'Fourth. Losses actually sustained during the year, incurred in his business or trade: * * * Provided, that * * * the * * * value of * * * property (acquired before March 1, 1913) as of March 1, 1913, shall be the basis for determining the amount of such loss. * *
'Seventh. A reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade. * *
*'Eighth. (a) In the case of oil and gas wells a reasonable allowance for actual reduction in flow and production; * * * (b) in the case of mines a reasonable allowance for depletion thereof: * * * Provided, That when the allowances * * * shall equal the capital originally invested * * * no further allowance shall be made.'