Before GOODRICH and KALODNER, Circuit Judges, and WOOD, District Judge.
These three appeals raise tax questions coming from the process of strip coal mining in western Pennsylvania. We have taken three appeals together. Ther involve a number of contracts between Denise Coal Company and persons with whom it made contracts for strip mining on lands which it either owned in fee or in which it purchased or leased mineral rights. The coal strip contracts differ slightly in individual particulars but we think that there is no substantial difference among them and that we may treat the problems in one as common to all. The opinion of the Tax Court gives a detailed statement of the entire situation. 1957, 29 T.C. 528. Petitioners are the Denise Corporation and the equal partners in the now defunct Denise partnership.
There are three questions involved in each of the appeals. One has to do with depletion, another with a reserve for rehabilitation and a third with loss of value in lands which have been subjected to the strip mining process.
[1, 2] The first point presented by the taxpayers, and on which the Tax Court denied them their claim, has to do with the depletion allowance in coal mining operations.*fn1 The statute provided for a five per cent annual depletion deduction in coal mining cases.*fn2 The theory of the depletion allowance has been stated many times by many courts and is summed up by Mr. Justice Whittaker in Parsons v. Smith, 1959, 359 U.S. 215, 220, 79 S. Ct. 656, 660, 3 L. Ed. 2d 747, quoting from former opinions. The depletion deduction "'is permitted in recognition of the fact that the mineral deposits are wasting assets and is intended as compensation to the owner for the part used up in production.' * * * In short, the purpose of the depletion deduction is to permit the owner of a capital interest in mineral in place to make a tax-free recovery of that depleting capital asset." Often it is the stripper who claims the depletion deduction or part of it. This Court had that situation in Parsons v. Smith, 3 Cir., 1958, 255 F.2d 595, affirmed 1959, 359 U.S. 215, 79 S. Ct. 656, 3 L. Ed. 2d 747, and Huss v. Smith, 3 Cir., 1958, 255 F.2d 599, affirmed, 1959, 359 U.S. 215, 79 S. Ct. 656, 3 L. Ed. 2d 747. In the instant case the coal owner, by which we mean Denise who had the legal right to have the coal strip mined, is claiming the depletion allowance. The record does not show that the strippers have made any such claim. Both stripper and owner may not have this depletion allowance. The Commissioner seems to take the position of opposing either party who demands it. This was the case in Commissioner of Internal Revenue v. Southwest Exploration Co., 1956, 350 U.S. 308, 76 S. Ct. 395, 100 L. Ed. 347, in which the Commissioner had opposed both parties and lost to both in the lower courts but succeeded in getting the Supreme Court to allow it to only one.
The test of the validity of the strippers' claim to the allowance as worked out in the statute, regulations*fn3 and decisions is that the stripper, in order successfully to claim it, must have an "economic interest" as distinguished from merely an "economic advantage" from the contract. This is all worked out and well expressed in the opinions in the Parsons case both in this Court and on appeal. The instant case is one which bears many resemblances to Parsons and is quite different from the fact situation shown in Commissioner of Internal Revenue v. Mammoth Coal Co., 3 Cir., 1955, 229 F.2d 535, certiorari denied 1956, 352 U.S. 824, 77 S. Ct. 31, 1 L. Ed. 2d 47.
There are six stripping contracts involved in the proceedings before us: one with B. Perini and Sons, Inc. (Perini), one with Sanders and Bills (Sanders), two with Bozeman & Gray (Bozeman No. 1 and Bozeman No. 2) and two with Juliette Coal Company (Juliette No. 1 and Juliette No. 2). For the most part there are only minor differences in wording among these contracts. We set forth the Perini contract in an appendix to this opinion and indicate, where we deem it important, the places where the other contracts vary.
Like Parsons, and unlike Mammoth, the strippers in the instant case did not have an exclusive right to mine the coal involved; although only four of the contracts have an express provision to that effect, such a provision seems to be clearly implied in the other two and the government conceded as much in oral argument and in its brief. Nor did the strippers here agree to mine to exhaustion.
Here also, the strippers are paid at a definite contract price per ton. True, if prices, then subject to OPA regulation, go up the stripper gets more, but if prices go down the stripper does not necessarily get less; the price in the latter instance is subject to readjustment by the parties.
It is clear that payment is to be made by Denise for all coal leaving the pit (see section 2 of the Perini contract in appendix). The payment remittance provisions are not to the contrary, as the government would have us believe. Although payment remittances in three of these contracts are geared to "coal mined and sold," this in no way indicates that Denise will not pay the strippers for coal mined, removed and loaded but which cannot be sold for one reason or another; in fact, the last sentence of the first paragraph of the Perini contract gives just the opposite impression. Although the other three contracts permit the strippers to sell, in their own names, any coal which they produce, but which Denise fails to sell, even then the stripper can only retain an amount equal to the contract price (plus a sales commission) and must remit the excess to Denise. And even in these latter three contracts, it is only an "option" which the stripper has to sell the coal; if it so desires, it can decide to sit back (and not earn the sales commission) and will still be entitled to payment. Thus, it is seen that the strippers, under all the contracts, were looking to Denise alone for payment, that their right to payment did not depend upon Denise's ability to sell the coal*fn4 and that the strippers had no right to sell the coal to others, except in the limited situation noted above, and had no right to participate in the profits from any sales.
Although, unlike Parsons, the contracts here were not terminable at will without cause, they were subject to termination by Denise on short notice upon the happening of certain events. All of the contracts were on a year to year basis and could be terminated upon 60 days notice prior to April 1. The fact that Denise could not cancel during the year if the stripper produced a minimum amount of coal and if Denise could sell at a 10% profit is not, in our opinion, sufficient basis to say that the stripper had an "economic interest" in the coal.
The investments of the strippers were in access roads, in equipment for their own businesses and in portable equipment shops and field offices for their own personnel. The machinery and equipment were not wasting assets but ordinary depreciable property. All machinery and equipment were readily removable and there is nothing in the record to indicate that they were not usable on other jobs. On the other hand, Denise itself furnished the loading docks, conveyors, sidings and tipples.
Finally, it should be noted that Denise paid all real estate taxes on the properties involved, put up all bonds for rehabilitation of the properties stripped and paid the insurance on all of its structures.
The Tax Court decision was made prior to the affirmance of our Parsons decision by the Supreme Court. We conclude in this case that while the strippers no doubt had an "economic advantage" (either realized or hoped for) in the performance of these contracts there was no "economic interest" in them as the cases require in order that they may have the depletion allowance. The decision of the Tax Court on this point will be reversed.
2. Rehabilitation Problem.
Strip mining is no doubt an effective and money-saving way to remove coal from land in large quantities. But its effect on the appearance of the landscape after the operation is completed is worse, perhaps, than war. The land is laid waste. To meet this problem some of the coal mining states have passed statutes requiring strip mine operators to rehabilitate the land devastated by the mining operations.
Pennsylvania passed such a statute in 1945. The statute requires that the overburden must be replaced within one year after the completion of the strip mining operation and that trees, shrubs or grasses must be planted on the lands in an effort to restore the landscape to what it was before the mining took place. Before commencing any strip mining the operator must file performance bonds.*fn5
In this case Denise was on the accrual system of accounting. It set up on its books for each year an allowance for the estimated cost of rehabilitating the property mined during the year to meet the requirements of the Pennsylvania statute. The Commissioner refuses to allow this as an item of expense "paid or incurred during the taxable year," Int. Rev. Code of 939, § 23(a)(1)(A), and the Tax Court has upheld him. The argument is that Denise did not accurately estimate what the rehabilitation process would cost. Furthermore, says the Commissioner, while you posted the bond as required by the Pennsylvania law, it appears that the Pennsylvania authorities were not exacting in making you conform to it. You had more time than the statute allows and some of your replacements are not yet completed. Perhaps you may not even complete them; maybe you will forfeit the bonds instead.
This last point we think little of. The Pennsylvania statute imposes a fixed and definite obligation. We cannot suspect these taxpayers of an intention not to fulfill it. The matter of timing was evidently not considered by Pennsylvania authorities to be of the essence. Indeed, on some of the property, it is shown, deep mining was still going on when the stripping operations had been completed. Just how far this extends and what the ...