Helvering v. Wilshire Oil Co., Inc., 308 U.S. 90 (1939)
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Helvering v. Wilshire Oil Co., Inc.
No. 1
Argued October 9, 1939
Decided November 6, 1939 *
308 U.S. 90
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE NINTH CIRCUIT
Syllabus
1. An oil company which, pursuant to a Treasury Regulation, elected irrevocably to deduct development expenses from gross income in computing its taxable net income, rather than charge them to capital account, and which made this election at a time when Treasury practice under the Revenue Acts of 1921, § 234(a)(9), and 1924, § 204(c), required that "operative expenses," but not expenses of development, be deducted from gross income in computing "the net income from the property" which limits the depletion allowance, has no ground to attack as retroactive a later regulation made under the Revenue Act of 1928, § 114(b)(3), and looking to the future, which requires that development, as well as operative, expenses be deducted in the computation. P. 97.
Tax statutes and regulations are subject to change. The taxpayer, in making its election, took the risk that the method of treating depletion might be altered by statute or authorized regulation.
2. The claim that it was inequitable in the present case to alter the regulations in the manner above described after the taxpayer had made its irrevocable election in its return for the year 1925 cannot be allowed in view of the fact that, in 1927, after the basis of depletion had been changed by the Act of 1926 from a "discovery value" to a percentage basis, an opportunity to make a new election as to the treatment of development expenses for taxable periods ending on or after January 1, 1925, was offered by Treasury decision, of which the taxpayer failed to take advantage. P. 97.
An opinion of the General Counsel of the Treasury is considered in this case, in connection with a Treasury decision, as affording notice that a change might be made in the practice touching the treatment of development expenses in determining depletion allowances for oil wells.
3. The term "net income from the property," used in the Revenue Acts of 1921, 1924, 1926, and 1928 as a limitation upon allowance for depletion of mines, including oil wells, was construed by the Treasury, under the two earlier statutes, as meaning gross income from the property less "operating expenses," not including development expenses. Under the Act of 1926, however (which adopted an arbitrary percentage of gross receipts, instead of "discovery value," as the basis of depletion allowances for oil and gas wells), the Treasury changed its policy in respect of such deductions and altered its regulation, and, under the Act of 1928, it promulgated a regulation which required that development expenses as well as operating expenses be deducted in computing the net income limitation on depletion where the taxpayer had elected to deduct development expenses in computation of taxable net income.
Held:
(1) That the legislative approval of the earlier administrative construction of the term "net income from the property," implied from the reenactment in 1924 of the statutory provision of 1921, cannot be attributed also to the reenactment of 1928 in view of the intervening change of Treasury construction of the same statutory language in the Act of 1926. P. 99.
(2) The statement that administrative construction receives legislative approval by reenactment of a statutory provision with out material change applies where the validity of administrative action, standing by itself, may be dubious, or where ambiguities in a statute or rules are resolved by reference to administrative practice prior to reenactment of a statute, and where it does not appear that the rule or practice has been changed by the administrative agency through exercise of its continuing rulemaking power. It does not mean that a regulation interpreting a provision of one Act becomes frozen into another Act merely by reenactment of that provision, so that that administrative interpretation cannot be changed prospectively through exercise of appropriate rulemaking powers. P. 100.
4. The power conferred by § 23(1) of the Revenue Act of 1928 to make rules and regulations for the computation of depletion allowances extends to the percentage depletion allowance under § 114(b)(3), and includes administrative construction of the ambiguous phrase "net income from the property." P. 101.
Restrictions on that power should not be lightly imposed where the incidence of such rules as are promulgated is prospective only.
95 F.2d 971 reversed.
Certiorari, 306 U.S. 628, to review an affirmance by the court below of a decision of the Board of Tax Appeals (35 B.T.A. 450) reducing a deficiency assessment.