10 T.C. 908">*908 The Commissioner determined the following deficiencies: 10 T.C. 908">*909

Those deficiencies were determined against Oliver Iron Mining Co., successor of Neville Iron Mining Co., for taxes due from Neville for the years before it was merged with Oliver. The two companies are referred to herein as Oliver and Neville. Two issues are presented for decision. One is whether the Commissioner erred in using as the gross1948 U.S. Tax Ct. LEXIS 182">*183 income from the property, for the purpose of percentage depletion, the net amount received by Neville from the operation of the Morris Day and Nelson 40 mines, instead of the gross income from sales of the ore. The other issue is whether the Commissioner erred in failing to allow a deduction of $ 508,976.36 for 1936 as a loss on a lease surrendered in that year. The parties indicate that they will agree upon an adjustment in the dividends paid credit for 1939 once the first issue is decided.

FINDINGS OF FACT.

The returns for the taxable years were filed with the collector of internal revenue for the second district of New York.

Oliver and Neville were separate Minnesota corporations during the taxable years. Oliver, Neville, and 35 other Minnesota corporations, all wholly owned subsidiaries of the United States Steel Corporation (herein called Steel), merged in December 1945 under the name of Oliver.

The laws of Minnesota, prior to April 13, 1945, prohibited a corporation, such as those mentioned herein, from owning more than 5,000 acres of land. Numerous corporations were formed so that large ore acreage could be held, each corporation holding not more than 5,000 acres.

There1948 U.S. Tax Ct. LEXIS 182">*184 was a market for only a relatively small part of the readily available ore in the territory. Oliver had an organization and equipment sufficient to permit the mining of ore from a large territory. Steel charged Oliver and one other corporation with the responsibility of determining the order in which, and the extent to which, the various properties should be developed. Contracts were entered into for that purpose. Oliver became the sole operating company in 1904.

The contract between Neville and Oliver, in effect during the taxable years, was entered into in January 1921. Neville was called the owner and Oliver, the operator, in that contract. It described the various properties owned by Neville and recited that Neville was not adequately equipped to manage and operate those properties and Oliver 10 T.C. 908">*910 was, as a result of which both parties believed that Oliver could mine, produce, ship and sell the product to better advantage than could Neville. It was agreed that Oliver should have the right and obligation to manage and operate the properties by mining, shipping, marketing, and selling such ore as could be profitably produced and marketed, conducting all negotiations, 1948 U.S. Tax Ct. LEXIS 182">*185 making all decisions, entering into all contracts, and performing every act incidental to the mining operations. Oliver was to pay all costs and expenses of the operation, including taxes, with the exception of Federal and state income and Federal excise taxes. Oliver was to collect and retain all moneys accruing from the sale of ore or otherwise "subject, however, to payments to be made to the owner as hereinafter provided." Neville turned over to Oliver personal property, including equipment, accounts receivable, inventories, and other items which Oliver was to pay for on the termination of the agreement. Oliver was to advance any additional working capital necessary to operate the properties. Oliver was to pay Neville, on or before the 20th of March in each year, the total amount received by it from the sale of ore during the preceding calendar year, after deducting from the gross receipts all amounts paid or incurred by Oliver in the operation of the properties, the fair value of the use of the equipment furnished by Oliver in the operation, taxes, royalties, transportation charges, administration expenses, and any other charges incurred incident to the operations, together1948 U.S. Tax Ct. LEXIS 182">*186 with an allowance to Oliver for its services of 4 cents per gross ton of ore shipped from the mines of Neville during the calendar year.

Oliver paid all costs, charges, and expenses of the management and operation of the properties of Neville and all taxes and assessments, except Federal and state income and Federal excise taxes during the taxable years, and reimbursed itself for such payments by deducting the amount thereof from the total amount collected from the sale of ore mined from the properties of Neville. Oliver furnished annual statements to Neville setting forth the amounts and sale prices of the tonnage sold and the expenses incident thereto.

Oliver, in paying royalties due under leases owned by Neville, showed on the vouchers to the lessors that the payments were being made on behalf of Neville. Payments of taxes also showed that they were made on behalf of Neville.

Neville furnished Oliver with funds from time to time for advance royalties and for the purchase and construction of plants. Oliver recouped those advances as ore was sold and charged Neville for any portion not recouped in that way. Oliver, at the beginning of 1921, held funds of Neville in the amount1948 U.S. Tax Ct. LEXIS 182">*187 of $ 4,565,000. It continued to hold that amount until December 1932, when a part of it was applied against 10 T.C. 908">*911 Neville's operating deficit for that year. Steel assumed the remaining portion of Oliver's debt to Neville in March 1935. Thereafter, Oliver obtained funds from Steel and advanced them to Neville as additional working capital was needed, charging interest thereon at 5 per cent. Neville was charged substantial amounts as interest during the taxable years.

The officers of Oliver and Neville were the same during the taxable years.

Oliver maintained records containing separate accounts showing the operations for each separate owner under various contracts. The costs of maintaining that system and other general overhead expenses were allocated to the owner companies in the ratio of tonnage produced.

Iron ore properties, known as the Morris Day and Nelson 40 mines, were among the properties of Neville, operated by Oliver, during the taxable years. Neville had elected to calculate its depletion with respect to those two properties on the percentage basis for Federal income and profits tax purposes. The stipulation shows the gross profit and net income from the operation1948 U.S. Tax Ct. LEXIS 182">*188 of those mines for each of the taxable years. The net income figures shown are the net receipts payable by Oliver to Neville.

Deductions were claimed on the returns for percentage depletion on the Morris Day and Nelson 40 mines, based upon the figures shown in the operating statements furnished by Oliver to Neville for each of the taxable years. The Commissioner disallowed those deductions and allowed smaller ones, based upon the net amount received by Neville from Oliver in each of the taxable years. The parties are in agreement as to the deductions for depletion if the petitioner's first contention is sustained, and they are also in agreement as to the amount of deductions for depletion if the Commissioner's contention is sustained.

Neville entered into a lease agreement on October 1, 1906, referred to hereinafter as the lease. It was for a term of 30 years from January 1, 1907, subject to the right of Neville to terminate the lease by giving 3 months written notice to the lessors. Neville entered into the lease under an option held by A. M. Chisholm. Chisholm assigned his interest in the lease to Neville, subject, inter alia, to the condition that if Neville should desire1948 U.S. Tax Ct. LEXIS 182">*189 to surrender the lease it must first give 30 days notice to Chisholm of its intention and reassign the lease to Chisholm if he so desired. Royalties were payable by Neville to the lessors and to Chisholm. The lease was extended in 1917 to January 1, 1957, but no change was made in the requirements as to the notices mentioned above.

10 T.C. 908">*912 The properties had been operated previously, but there were no operations on the leased properties during 1935 or 1936 because of the low quality of the remaining ore. Neville, or those acting for it, felt in 1935 that the lease should either be surrendered or the lessor should agree to extend the lease and waive further payment of minimum royalties. The lessors would not agree to that proposal, but offered to sell the fee to Neville for $ 40,000. Neville did not want to buy the fee unless the Chisholm rights could be terminated.

Neville gave notice on March 25, 1936, of its intention to surrender the lease. The successors in interest to Chisholm did not elect to take a reassignment of the lease within the 30-day period allowed. Neville, on April 30, 1936, notified the lessors of its election to terminate the lease.

Neville, during the 1948 U.S. Tax Ct. LEXIS 182">*190 existence of the lease, had no agreement or understanding with the owners to purchase the fee, but it planned to purchase the fee for $ 40,000 or better, if that could be arranged after the lease was terminated. It wanted the fee in order to give it access to other minerals which it owned and planned to mine at a later date. Neville, on September 2, 1936, offered $ 36,000 for the fee in the property formerly covered by the lease. That offer was not accepted and Neville raised its bid to $ 40,000 on September 4, 1936, and purchased the property. The deed was dated October 17, 1936, and payment was made on December 10, 1936.

The cost of the lease to Neville, as of January 1, 1936, was $ 508,976.36. Neville claimed a loss deduction in that amount on its return for 1936. The Commissioner, in determining the deficiency, disallowed the entire deduction, explaining that no deductible loss with respect to the lease was sustained in that year.

The stipulation of facts is incorporated herein by this reference.

OPINION.

The first issue relates to the deduction for depletion allowable to Neville for each of the taxable years. Neville elected to take percentage depletion and the Commissioner1948 U.S. Tax Ct. LEXIS 182">*191 has allowed a deduction computed under that method. The only difference between the parties is as to the "gross income from the property." Neville contends that its "percentage depletion should be calculated in exactly the same manner as if it had used an organization of its own to operate the properties, Oliver's function being simply that of an operating agent, acting for a commission and compensation for use of equipment." It argues that Oliver sold the ore from these two mines for the account of Neville, so that Neville's gross income from the properties for the purpose of percentage depletion is the actual sale price of the ore sold in each year under the operating contract.

10 T.C. 908">*913 The petitioner cites and relies upon ; ; certiorari denied, ; ; ; ; affd., .1948 U.S. Tax Ct. LEXIS 182">*192 It was held in these cases that the gross income of each owner was his proportionate part of the gross income of the mineral property, and he was entitled to deduct his proportionate share of the operating expenses. That was despite the fact that the owner took no part in the operation of the property and received only a net amount after payment of all charges. An operating company in each of those cases had exclusive control over the operation of the properties, and it produced the minerals, sold them, and paid the owner his proportionate share after deducting all expenses and charges.

The deductions which the Commissioner allowed were computed upon the actual amount which Oliver paid to Neville for each year under the operating contract, and the Commissioner argues that those amounts were Neville's gross income from the property. He does not suggest any theory, however, upon which his determination could be properly sustained. If he contended that Neville had leased its property to Oliver for a rent, then Neville's gross income from the property would be limited to the rent plus any obligation of Neville's, such as real estate taxes, paid by Oliver. ;1948 U.S. Tax Ct. LEXIS 182">*193 ; . However, he has expressly disavowed any contention that the operating contract is a lease or an assignment of a lease. Neville's gross income from the property would likewise be limited to the net amount received from Oliver, plus obligations of Neville paid by Oliver, if Neville had sold the ore to Oliver at a price which allowed for the operating expenses, because in that case the purchaser would be carrying on the operations solely for its own benefit. ; affd., . But the facts here distinguished the present case from the one just cited. Likewise the Commissioner might be in a stronger position if he contended, successfully, that Neville and Oliver were joint venturers. He makes no such contention.

Instead of taking any of those positions, the Commissioner seems to agree that Oliver was an agent of Neville, and he fails to distinguish the cases cited by the petitioner in which the operator 1948 U.S. Tax Ct. LEXIS 182">*194 was regarded as an agent for the inactive co-owner. Income from a property operated by an agent is income of the owner, regardless of how independent the agent may be. Neville was the sole owner and Oliver had no title of any kind to the property, whereas, in the cases cited by 10 T.C. 908">*914 the petitioner, a nonoperating owner, corresponding to Neville, had only a percentage of ownership, and the operating company, corresponding to Oliver, was a part owner. But that difference does not distinguish the cases in principle. Where a property is operated by one for the benefit of another which owns an interest in the property, the gross income of the latter from the property is not limited to the net amount received from the operator. Each owner must report his proportionate share of the gross sales and is entitled to deduct his proportionate share of all expenses and other amounts allowed as deductions under the Internal Revenue Code. His deduction for percentage depletion is based upon the gross income before the deductions mentioned. Every argument which the respondent makes in the present case would have been applicable in the cases cited by the petitioner. Indeed, the respondent1948 U.S. Tax Ct. LEXIS 182">*195 was the winning party in several of those cases and successfully resisted the very arguments he now makes. This point is decided for the petitioner upon authority of the cases cited by the petitioner.

The lease involved in the second issue had become burdensome and valueless. Neville terminated it in 1936 without any strings or conditions attached. That closed the taxable transaction which it had in that lease and it thereby sustained a loss of the stipulated remaining cost. The respondent cites no cases to the contrary, but argues that Neville had no loss in 1936 because it merely carried out a plan for obtaining a better title to the ore property by surrendering the lease and purchasing the fee. If Neville had used the lease or its rights thereunder to acquire the fee, the remaining cost of the lease might be regarded as a part of the cost of the fee, but that was not done. Instead the lease was canceled and the fee was purchased later. There was no understanding when the lease was canceled that Neville would purchase the fee. It had plans and desires for such a purchase, but it had no understanding or agreement with the owner-lessors. Indeed, it was necessary that the 1948 U.S. Tax Ct. LEXIS 182">*196 lease should be canceled in order to terminate the rights of Chisholm. Neville did not want to buy the fee until those rights had been terminated. The negotiations for purchase were started anew from scratch after the termination of the lease. The fact that Neville was willing to pay $ 40,000 for the fee is not inconsistent with the fact that the lease was a liability to Neville. The one had value, the other had none. The fee was purchased for a different purpose from that for which the lease had been acquired. There was no connection between the acquisition of the fee and the termination of the lease which would prevent the loss from the latter transaction from being recognized for tax purposes.

Decision will be entered under Rule 50.