between the two being $ 58,368.60. It also made use of a net operating loss carry-over from the years 1941 and 1942 in the amount of $ 57,578.45 pursuant to § 122 of the Code. The latter figure was arrived at by the taxpayer's subtracting from $ 114,313.58, the amount of the net operating loss carry-over from 1941 an 1942, the amount of $ 58,368.60, the excess of percentage over cost depletion for 1943. It also computed the basis of its coal lands as of December 31, 1943, to be $ 112,777.34, by deducting $ 82,015.05, the amount of adjusted cost depletion to which the taxpayer was entitled for 1943, from $ 194,792.39, the cost basis for its coal lands as of December 31, 1942.
In computing its net income for the year 1944, taxpayer deducted $ 87,657.11, the amount of percentage depletion for that year, from $ 112,777.34, the reported basis of its coal lands as of December 31, 1943, leaving $ 25,120.23 as the reported basis of its coal lands as of December 31, 1944.
The taxpayer, in its returns for 1945, computed a net operating loss for that year in the amount of $ 84,645.27. This sum included the amount of $ 25,120.23, the reported unrecovered cost as of the end of 1944. In this year it also recomputed, under § 122 of the Code, its 1943 income by making use of a net operating loss carry-back from the year 1945 in the amount of $ 84,645.27. As a result of this deduction, it filed a claim for refund of corporation income tax for the year 1943. It also recomputed its excess profits tax for the calendar year 1944 by taking into consideration an unused excess profits credit carry-back from the year 1945 in the amount of $ 37,349.66, and by reason thereof filed a claim for refund of excess profits tax for the year 1944.
The Commissioner of Internal Revenue gave as his reason for disallowing the claims for refunds that the taxpayer's reportable loss for the year 1945 was its net operating loss in the amount of $ 59,525.04, and that this amount should not have been increased by the claimed amount of unrecovered cost because the cost of taxpayer's coal lands had been written off in 1944. In other words, the Commissioner contends that the ascertaining of the amount of the unrecovered cost from year to year, for depletion purposes, must be done without the benefit of, and is unaffected by, the adjustments required by § 122(d)(1). Thus the Commissioner states that the taxpayer's unrecovered cost is as follows: (a) As of the end of 1943 it was $ 54,408.74, the difference between $ 194,792.39, the undisputed amount of the unrecovered cost as of the end of 1942, and $ 140,383.65, the amount of percentage depletion for 1943, and (b) As of the end of 1944 it was zero, because the percentage depletion of $ 87,657.11 for that year was more than enough to wipe out the remaining unrecovered cost of $ 54,408.74 as of the end of 1943. Consequently the Commissioner claims there was no unrecovered cost to be carried over into the year 1945.
Contrary to the Commissioner, the taxpayer contends that, until it is written off, the adjustment required by § 122(d)(1) is to be taken into consideration in determining the amount of the cost basis remaining at the end of each year. As authority for doing so, it cites § 113(b)(1)(B) of the Code, 26 U.S.C. (1926 Ed.) § 113(b)(1)(B). This section in pertinent part provided:
'(b) Adjusted basis. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.