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UNITED STATES V. LUDEY, 274 U. S. 295 (1927)

U.S. Supreme Court

United States v. Ludey, 274 U.S. 295 (1927)

United States v. Ludey

No. 289

Argued April 21, 22, 1927

Decided May 16, 1927

274 U.S. 295


1. Under the income and excess profits provisions of the Revenue Act of 1916, as amended by Revenue Act of 1917, in determining the existence and amount of profit realized from a sale of oil mining properties -- land, leases, and equipment -- the cost of the property sold is the original cost to the taxpayer (if purchased after March 1, 1913, or its value on that date if acquired earlier for less) diminished by deductions for depreciation and depletion occurring between the dates of purchase (or March 1, 1913) and sale. P. 274 U. S. 300.

2. The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. P. 274 U. S. 300.

3. When a plant is disposed of after years of use, the thing then sold is not the whole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties. P. 274 U. S. 301.

4. This rule applies to mining as well as to mercantile business. P. 274 U. S. 301.

5. The depletion charge permitted as a deduction from the gross income in determining the taxable income of mines for any year represents the reduction in the mineral contents of the reserves from which the product is taken. Because the quantity originally in the reserve is not actually known, the percentage of the whole withdrawn in any year, and hence the appropriate depletion charge, is necessarily a rough estimate. P. 274 U. S. 302.

6. The amounts of depreciation and depletion to be deducted from cost to ascertain gain on a sale of oil properties are equal to the aggregates of depreciation and depletion which the taxpayer was entitled to deduct from gross income in his income tax returns for earlier years; but are not dependent on the amounts which he actually so claimed. P. 274 U. S. 303.

61 Ct.Cls. 126 reversed.

Certiorari (271 U.S. 651) to a judgment of the Court of Claims for an amount exacted as additional income and excess profits taxes.

Page 274 U. S. 296

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