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Commissioner of Internal Revenue v. Mammoth Coal Co.

decided : November 30, 1955.


Author: Staley

Before McLAUGHLIN, KALODNER, and STALEY, Circuit Judges.

STALEY, Circuit Judge.

The Commissioner of Internal Revenue appeals from a decision of the Tax Court*fn1 entered after a determination that for the fiscal years ended August 31, 1947, and August 31, 1948, the taxpayer, Mammoth Coal Company, in determining its percentage depletion deduction, did not have to eliminate from gross income amounts paid to the Capparell Stripping & Construction Company, Inc., (the stripper) for strip-mining coal on the taxpayer's property.

Since the operative facts in the two fiscal years involved are the same, the 1947 facts will be used in discussion.

In December, 1946, the taxpayer and the stripper entered into a written agreement whereby the stripper acquired an exclusive, indefinite right to stripmine coal on certain property which the taxpayer owned.*fn2 During the fiscal year ended in 1947, the taxpayer received $1,369,719.10 from the sale of coal mined under the agreement. Of this total the stripper received $655,929.03.

The taxpayer's position, which was upheld by the Tax Court, is that it should be permitted to use the $1,369,719.10 as its gross income figure in computing its percentage depletion deduction. On the other hand, the government contends that the stripper is entitled to percentage depletion deduction computed on the basis of the $655,929.03 which the stripper received from the mining operation, and, accordingly, the taxpayer must eliminate this same $655,929.03 from its gross income before computing the percentage depletion deduction, under Sections 23(m) and 114(b) of the Internal Revenue Code of 1939.*fn3

All parties agree that either the stripper or the taxpayer, but not both, is entitled to a percentage depletion deduction in regard to the $655,929.03. Thus, if the stripper is entitled to the deduction, the taxpayer is not.

Under the applicable Treasury Regulation, an "* * * owner of an economic interest in mineral deposits or standing timber is allowed annual depletion deductions. * * * An economic interest is possessed in every case in which the taxpayer has acquired, by investment, any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the severance and sale of the mineral or timber, to which he must look for a return of his capital.* * *"*fn4

The question of what constitutes an economic interest*fn5 has been presented to the various courts in numerous instances.*fn6 There is no general rule that a strip miner is or is not entitled to percentage depletion. The facts in each case determine the result.

In the Supreme Court's most recent decision involving percentage depletion, Burton-Sutton Oil Co. v. Commissioner of Internal Revenue, 1946, 328 U.S. 25, 66 S. Ct. 861, 90 L. Ed. 1062, it was pointed out that what one's interest in depletable property is called under state law and the nature of the instrument creating such interest is unimportant for federal purposes. The Court noted that the cost of the capital investment to the beneficiary of the depletion is unimportant. "It is the lessor's, lessee's or transferee's 'possibility of profit' from the use of his rights over production, 'dependent solely upon the extraction and sale of the oil,' which marks an economic interest * * *." 328 U.S. at pages 34-35, 66 S. Ct. at page 867.

We think the interest which the stripper acquired in the case at bar was sufficiently significant to entitle it to percentage depletion.

Under the agreement the stripper was to excavate, remove, and dispose of all earth and rock, or overburden, overlying the coal veins in the three tracts, to recover all salvageable coal so exposed, and to deliver all material extracted from the veins to petitioner at a specified price per ton, which would vary according to whether the materials were weighed before or after processing through a cleaning plant which the taxpayer was going to erect. Adjustments in the amount of per ton payments were to be made in the event of a general increase or decrease in the wages of employees in the Southern Field anthracite mines of Pennsylvania.

The land had been previously deepmined and strip-mined, and the agreement stated that the taxpayer would not be liable in any way for removal of more overburden than was anticipated or for failure of the stripper to recover any coal. The record is silent as to what the expectations were concerning the anticipated amount of avathe areas embraced by the agreement. This exclusive right was not limited in time but was to continue indefinitely. The taxpayer did have the right to call for a suspension of mining operations, and in such event under certain conditions regarding time and notice the stripper was free to give up the mining operation, but this was his own choice and unless he voluntarily did so, the taxpayer, though calling for a suspension of operations, could not permit anyone else to mine the area. Thus, for all practical purposes, the stripper had the exclusive right to mine the area to exhaustion.

The stripper provided the necessary buildings, equipment, and machinery for the stripping operations. $4,842.72 was expended in erecting buildings and almost a million dollars worth of equipment and machinery was used. (Almost $800,000 worth was new, provided ...

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