UNITED STATES DISTRICT COURT, WESTERN DISTRICT OF PENNSYLVANIA
February 16, 1954
BIG FOUR OIL & GAS CO.
The opinion of the court was delivered by: GOURLEY
This is a motion of the United States of America for summary judgment in a taxpayer's suit to recover part of its 1947 corporate income tax.
The single issue posed is whether in computing taxpayer's percentage depletion deduction for 1947, the scrap value of salvage sold in that year is to be included in 'net income * * * from the property' as that term is used in Section 114(b)(3) of the Internal Revenue Code. 26 U.S.C.A. § 114(b)(3).
Taxpayer's theory, as expressed in the claim for refund, is that the net income from the property should be increased by the amount of proceeds received from the disposition of scrap.
The fallacy in this theory is that it treats as a part of 'net income * * * from the property' the salvage proceeds, whereas they are not properly a part thereof. 'Net income * * * from the property' is the 'gross income from the property' less allowable deductions; and 'gross income from the property' is 'the amount for which the taxpayer sells the oil and gas in the immediate vicinity of the well.' In other words, it is the gross income produced by the well itself, and does not include miscellaneous income picked up by salvaging junk equipment used in drilling or maintaining the well. Treasury Regulation III, Section 29.23(m) -- 1(g), also Section 29.23(m) -- 1(f).
Regulations promulgated within the authority of a statute, have the force and effect of law. Gowanda Co-operative Saving & Loan Ass'n v. Gray, 2 Cir., 183 F.2d 367.
In view of the fact that taxpayer makes no attack upon the regulation, I have no alternative but to conclude that the proceeds of the sale of scrap materials cannot be included in the 'gross income from the property', nor in the 'net income * * * from the property', as those terms are used in Section 114(b)(3).
The motion of the United States of America for summary judgment should be granted.
An appropriate order is entered.
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