ADMINISTRATIVE LAW - TAXATION - POWER OF BOARD TO ADOPT RULES AND REGULATIONS - INFLEXIBILITY OF PRIOR RULING BY REENACTMENT OF STATUTE WITHOUT CHANGE

The respondent oil company in computing its net income for the years 1929-1930 for the purpose of applying the depletion deduction provisions of the Revenue Act of 1928 refused to deduct certain development expenditures, although it had deducted those development expenditures in computing its taxable net income for these years. Under the rule-making power of section 23 (1) of that act, the commissioner defined net income of the taxpayer as used in section 114 (b)(3) as meaning gross income from the sale of gas and oil less certain deductions, including development expenses (if the taxpayer had elected to deduct development expenses rather than charging them to capital account returnable through depletion). The depletion provision of the Revenue Act of 1928 was substantially the same as the 1921 Act, the 1924 Act, and the 1926 Act. Under the Acts of 1921 and 1924, the admitted Treasury practice was to permit net income from the property for the purposes of depletion to be computed without regard to development expenditures, that practice being embodied in a ruling under the Act of 1924. In a controversy to determine whether respondent was compelled to deduct development expenses to reach net income for the purposes of depletion, the Board of Tax Appeals held for respondent deciding that the prior Treasury ruling had received judicial sanction under the 1926 Act and had been adopted by Congress by the reenactment of the same provision in the 1928 Act. The decision was affirmed by the United States Circuit Court of Appeals, one judge dissenting, upon the theory that Congress by repeated reenactment of the provision adopted the prior ruling as the proper expression of legislative intent. The Supreme Court reversed and held for the commissioner, deciding that the rule of statutory construction contended for is not so inflexible as to preclude a change of interpretation through the exercise of rule-making power. Helvering v. Wilshire Oil Co., (U. S. 1939) 60 S. Ct. 18