Petition for Writ of Certiorari — Kohinoor Coal Co. v. Commissioner

TABLE OF CONTENTS

Petition for Writ of Certiorari

1. Summary Statement of Matter Involved

2. Statement as to Jurisdiction of the Supreme Court

of the United States

(a) Nature of the case; statutory provision ‘and

cases believed to sustain jurisdiction

(b) Sections of the Internal Revenue Code in-

volved .

(c) Date of judgment sought to be reviewed ....

3. Question Presented

4. Reasons Relied Upon for the Allowance of a Writ

of Certiorari

5. Prayer

Brief in Support of Petition for Writ of Certiorari

1. Statement of the Case

(a) Petitioner has an economic interest in the coal

(b) The question of whether or not a coal bank is

or is not a mine or whether the removal of coal

from a coal bank is mining has absolutely no

connection or relation with the present issue

(c) Mining is defined by statute to mean, in the

case of coal, cleaning, breaking, sizing and

loading for shipment

3. Conclusion

TABLE OF CONTENTS .

CITATIONS

STATUTES

Internal Revenue Code, Title 26, U.S. C. A.: PAGE

EN 6 Beet abbas ch eaawe't 2, 4, 5, 14, 15, 16

I eS aed hee uote Ul cai aan ke ee 2,4,5

Ss Fe Ee Oe SS Serer eres 2, 4, 5, 6, 16, 19, 24

RSS in kay pens kiadindpobide GAs eeadee 4,6

Revenue Act of 1926:

ETI SM Ss ncn ac bak pak gles obaeew aKa cae nee ace 16

in oi i en Cen Panes cc uwkek dai we keues 16

CasES

Atlas Mining Co. vs. Jones, 115 Fed. (2nd) 61 ......... 24

Boyle v. Coleraine Colliery Co., Appellant, 323 Pa. 224 13

Commissioner vs. Kennedy Mining and Milling Co. (9th

Rees by A: CAD GD cee cncchenennecas 20, 25, 27

Consolidated Chollar, Gould and Savage Mining Co. vs.

Commissioner, 133 Fed. (2nd) 440 .............. 25

Douglas vs. Commissioner (1944), 322 U. S. 275, 64 S.

3 BERS Es Se ep vere meres es 14, 15, 20, 27

Herring vs. Commissioner (1934), 293 U. S. 322, 55 S.

Se EE Gala va kedav man ccc ead cexe een 14, 15, 19, 20, 27

Kirby Petroleum Co. vs. Commissioner (1946), 326 U.

8 Fg hee PTT rr ry re 4, 26

Lynch vs. Alworths-Stephens Co., 45 S. Ct. 274, 267

NC Mee ise Nica dC pmlaenuek Rata BONG ea 4, 10, 26

New Idria Quicksilver Mining Co. vs. Comm., 144 Fed.

SE EN 4 cb SOME GSA RA NOARE OM bee tenn eaey 22, 27

Palmer vs. Bender, 53 S. Ct. 225, 287 U.S. 55 ...... 4, 12, 26

Smith v. Glen Alden Coal Co., et al., Appellants, 347

eee eee eee eee eee eee ee eeeeeeeeeeeeeeeeee

1N THE

SUPREME COURT OF THE UNITED STATES.

October Term, 1949.

No.

Koxtnoor Coat Company,

Petitioner,

against

CoMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE THIRD

CIRCUIT.

TO THE HONORABLE THE CHIEF JUSTICE AND THE

ASSOCIATE JUSTICES OF THE SUPREME COURT

OF THE UNITED STATES:

Petitioner respectfully prays that a writ of certiorari

issue to review the judgment of the United States Court of

Appeals for the Third Circuit, reported in 171 Fed. 2nd 880,

which affirmed a judgment of the Tax Court of the United

2

States, reported in Vol. 6 C. C. H—Tax Court Memo. Deci-

sions, page 1078 (R. 8a-10a).

1. SUMMARY STATEMENT OF MATTER INVOLVED.

The question presented is whether the petitioner is en-

titled to an allowance for percentage depletion with respect

to its operations in the extraction and processing of coal

from coal or culm banks, which is leased from the owner of

an underlying coal mine. The claim for depletion allow-

ance is based upon Sections 23 (m) and (n); Section 114 (b)

(4) (A) and (B), as amended, of the Internal Revenue

Code.

The taxpayer is a Pennsylvania corporation, which en-

tered into an agreement with Turkey Run Fuels, Inc. on

February 11, 1941, whereby it leased from Turkey Run

Fuels, Inc., the owner of a coal mine, certain coal or culm

banks located on the surface of the mining property. The

coal or culm banks had been placed upon the surface of the

mining property by Turkey Run Fuels, Inc., the owner

and/or its predecessors. The lease was to run for ten years

or a shorter period if the marketable coal was earlier ex-

hausted from the banks. Petitioner was to pay royalties to

the owner of the coal mine of from ten to fifteen percent of _

the gross sales price of the coal at the mine (R. 19a) with a

minimum rental,of $24,000 per year (R. 18a) and was given

the right to remove all coal from the coal banks located on

the surface of the mining property. The Petitioner, in order

to extract the coal from said banks, and to wash, size and

load it for shipment, erected an anthracite breaker and in-

stalled other equipment and machinery at a cost to it of

approximately $150,000. It then proceeded with the opera-

tions enumerated during the taxable years.

The Commissioner refused to allow petitioner any deduc-

3

tion for percentage depletion for the years ending June 30,

1943, and June 30, 1944. The Tax Court upheld the Com-

missioner and the United States Court of Appeals for the

Third Circuit affirmed the Tax Court.

The Commissioner contends (1) a culm bank is not a

“mine”; (a) extraction of coal from a culm bank is not

“mining”; and (3) there is absent the requisite “economic

interest” for depletion allowance.

The taxpayer takes the position (1) whether a culm bank

is or is not a “mine” is immaterial, since Turkey Run Fuels,

Inc. is the owner of the underlying coal mine and the coal

on the surface came from the underlying coal mines: (2)

extraction of coal from a culm bank is “mining”, since

Congress, in amending Section 114 (b) (4) by adding para-

graph (b), broadened the definition of the word “mining”

as follows:

“The term ‘mining’, as used herein, shall be con-

sidered to include not merely the extraction of the ores

or minerals from the ground but also the ordinary treat-

ment processes normally applied by mine owners or

operators in order to obtain the commercially market-

able mineral product or products. The term ‘ordinary

treatment processes’, as used herein, shall include the

following: (i) In the case of coal—cleaning, breaking,

sizing and loading for shipment; * * *.”

and (3) it has the requisite “economic interest” since it

alone has the right to remove all the coal from the culm

banks.

2. STATEMENT AS TO JURISDICTION OF THE

SUPREME COURT OF THE UNITED STATES.

(a) Nature of the Case; Statutory Provision and Cases

Believed to Sustain Jurisdiction:

The judgment of the United States Court of Appeals for

the Third Circuit, which petitioner endeavors to have

examined and reversed here, holds that petitioner is not

entitled to a deduction for percentage depletion on the sale

of coal removed from a coal bank located on the surface of

a coal mining property.

The jurisdiction of the Supreme Court of the United

States is invoked under Section 237 (b) as amended, of the

Judicial Code (28 U.S. C. A. 344 (b)).

The cases relied upon to sustain jurisdiction are:

Kirby Petroleum Co. vs. Commissioner (1946), 326

U. S. 599, 66 S. Ct. 409;

Palmer vs. Bender, 53 S. Ct. 225, 287 U. S. 551;

Lynch vs. Alworths-Stephens Co., 45 S. Ct. 274,

267 U. S. 364.

(b) Sections of the Internal Revenue Code Involved:

The statutory provisions involved in the appeal are found

in paragraphs (m) and (n) of Sec. 23, and paragraph (b),

subparagraph (4) (A) and (4) (B) of Section 114 of the

Internal Revenue Code, Title 26 U.S.C. A. Sub-paragraph

(4) (B) of paragraph (b) of Sec. 114 was added by Sec.

124 (c) of the Revenue Act of 1943, and is as effective as

though it were in the revenue laws applicable to all taxable

years beginning after December 31, 1931.

5

Section 23, in force for the taxable periods here involved, _

insofar as pertinent, is as follows:

“Section 23. Deductions from Gross Income. In

computing net income there shall be allowed as deduc-

tions: * * *

“(m) Depletion. In the case of mines, oil and gas

wells, * * * a reasonable allowance for depietion * * *.

In the case of leases the deductions shall be equitably

apportioned between the lessor and lessee. * * *”

“(n) Basis for Depreciation and Depletion. The

basis upon which depletion, exhaustion * * * are to be

allowed in respect of any property shall be as provided

in Section 114.”

Section 114, in force for the taxable periods here involved,

insofar as pertinent, is as follows:

“Section 114. Basis for Depreciation and Depletion.

s* €

“(b) Basis for depletion.

“(1) General rule. The basis upon which depletion

is to be allowed in respect of any property shall be the

adjusted basis provided in section 113 (b) for the pur-

pose of determining the gain upon the sale or other

disposition of such property, except as provided in

paragraphs (2), (3), and (4) of this subsection. * * *

“(4) Percentage depletion for coal, * * *.

“(A) InGeneral. The allowance for depletion under

section 23 (m) shall be, in the case of coal mines, 5 per

centum * * * of the gross income from the property dur-

ing the taxable year, excluding from such gross in-

come an amount equa! to any rents or royalties paid or

incurred by the taxpayer in respect of the property.

Such allowance shall not exceed 50 per centum of the

net income of the taxpayer (computed without allow-

ance for depletion) from the property * * *.”

Section 114 (b) (4) (B), as added by Section 124 (c) of

the Revenue Act of 1943 (Act of February 25, 1944), effec-

tive as though it had been in the revenue laws applicable to

all taxable years beginning after December 31, 1931, so far

as pertinent, is as follows:

“(B) Definition of gross income from property. As

used in this paragraph the term ‘gross income from the

property’ means the gross income from mining. The

term ‘mining,’ as used herein, shall be considered to

include not merely the extraction of the ores or min-

erals from the ground but also the ordinary treatment

processes normally applied by mine owners or opera-

tors in order to obtain the commercially marketable

mineral product or products. The term ‘ordinary treat-

ment processes’, as used herein, shall include the fol-

lowing: (i) In the case of coal—cleaning, breaking,

sizing, and loading for shipment; * * *”

(c) Date of Judgment Sought to be Reviewed.

The judgment sought to be reviewed was entered by the

United States Court of Appeals for the Third Circuit on

December 20, 1948. Petition for rehearing was filed Janu-

ary 4, 1949. Petition for rehearing was refused on Janu-

ary 13, 1949.

3. QUESTION PRESENTED.

Is petitioner, a lessee, entitled to deduct percentage de-

pletion, in respect of income if derived during the taxable

period from its extraction, cleaning, breaking, sizing, load-

7

ing and sale of coal from certain culm or refuse banks,

where the said culm bank had been placed upon the sur-

face of the mining tract by the lessor and its predecessors

in title as a result of their coal mining operations conducted

upon said tract in prior years?

4. REASONS RELIED UPON FOR THE ALLOWANCE

OF A WRIT OF CERTIORARI.

(a) The United States Court of Appeals for the Third

Circuit, in rendering a decision in the present case, has ren-

dered a decision in conflict with decision of the United

States Court of Appeals in the Ninth Circuit.

(b) The United States Court of Appeals for the Third

Circuit has decided a Federal question in a way probably

in conflict with applicable decisions of this Court.

5. PRAYER.

WHEREFORE, your petitioner prays that a writ of cer-

tiorari be issued out of and under the seal of this Court

directed to the United States Court of Appeals for the Third

Circuit, commanding that Court to certify and send to this

Court, on a day certain to be named therein, a full and

complete transcript of the record of the proceedings in case

numbered 9630, October Term, 1947, entitled on its docket

“Kohinoor Coal Company, Petitioner v. Commissioner of

Internal Revenue, Respondent,” to the end that the cause

may be reviewed and determined by this Court as provided

by law, that the judgment may be reversed with costs, and

for such other and further relief as may be appropriately

granted in the premises.

IN THE

SUPREME COURT OF THE UNITED STATES.

October Term, 194

No.

Koxutnoor Coat Company,

Petitioner,

against

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

BRIEF IN SUPPORT OF PETITION FOR WRIT

OF CERTIORARI.

The petition for writ of certiorari refers to the opinions

of the United States Tax Court and the United States Court

of Appeals for the Third Circuit, the grounds upon which

jurisdiction is invoked, and the pertinent constitutional and

statutory provisions. It also sets forth a summary state-

ment of the matter involved and states the questions pre-

sented.

1. STATEMENT OF THE CASE.

There is no dispute as to the facts in the case, stipulation

of facts (R. 10a-36a), notice of final determination (R. 4a-

5a), appeal to the Tax Court (R. 2a-4a), the decision of

the Tax Court (R. 10a), the petition for review to the

United States Court of Appeals for the Third Circuit (R.

73a-76a), the decision of the United States Court of Ap-

peals (R. ) and the denial by that Court of petition

for rehearing (R. ).

The petitioner is a corporation organized under the laws

of the State of Pennsylvania with its principal place of busi-

ness located at Girardville, Pennsylvania. It filed its fed-

eral income and declared value excess profits tax returns

and its excess profits tax returns for the fiscal years ended

June 30, 1943, and June 30, 1944, with the Collector of

Internal Revenue for the 12th District of Pennsylvania at

Scranton, Pennsylvania (R. 10a).

During all periods of time herein mentioned petitioner

was engaged in the business of extracting coal from cer-

tain culm or refuse banks (R. 11a).

Under date of February 11, 1941, the petitioner entered

into a certain agreement of lease with Turkey Run Fuels,

Inc. To extract the coal from said culm or refuse banks

referred to in said agreement under the terms and condi-

tions thereof, petitioner erected an anthracite breaker and

installed other equipment which entailed a cost by petitioner

of approximately $150,000.00 (R. 11a).

During the fiscal years ended June 30, 1943, and June 30,

1944, the petitioner was engaged in the operation of the

leased culm or refuse banks, and prepared coal at a coal

breaker (R. lla).

For many years prior to June 30, 1943, the said culm or

10

refuse banks had been placed upon the surface of the min-

ing tracts owned by Turkey Run Fuels, Inc. by the said

lessor and its predecessors in title as the result of their

coal mining operations conducted upon said tracts. Upon

the execution of the aforementioned agreement of lease

dated February 11, 1941, the Kohinoor Coal Company en-

tered into occupancy of the said culm or refuse banks as

lessee from Turkey Run Fuels, Inc. and commenced oper-

ations with respect to said culm or refuse banks in order

to extract coal therefrom (R. 11a).

In filing its federal income tax return for the fiscal year

ending June 30, 1943, petitioner claimed a deduction for

percentage depletion, which was disallowed by the Com-

missioner, and in filing federal income tax return for the

fiscal year ending June 30, 1944, petitioner attached a rider

to said return setting forth therein that it elected to take

depletion on a percentage basis, which deduction was denied

by the Commissioner.

2. ARGUMENT.

Petitioner contends that under the law and various cases

it is entitled to take a deduction for percentage depletion.

Respondent denies that petitioner is entitled to the deduc-

tion for the following reasons: (a) It had no economic

interest in the coal or culm banks; (b) the coal or culm

banks do not constitute a mine; and (c) the removal of coal

from a culm bank and the washing, breaking and sizing is

not mining.

(a) In answer to the first contention, petitioner submits

the Commissioner of Internal Revenue raised the same con-

tention in the case of Lynch v. Alworths-Stephens Com-

pany, 45 S. Ct. Rept. 274, 267 U. S. 364. In that case a

11

lessee had the right to go in and remove ore deposits. The

Commissioner contended title to the ore remained in the

owner and lessor, and that the lessee was not entitled to

any deduction for depletion because it had no economic

interest in a mine. This Court stated:

“It is, of course, true that the leases here under re-

view did not convey a title to the unextracted ore de-

posits, but it is equally true that such leases conferring

upon the lessee an exclusive possession of the deposits

and the valuable right of removing and reducing the

ore to ownership created a very real and substantial

interest therein. See Hyatt v. Vincennes Bank, 113

U. S. 408, 416, 5 S. Ct. 573, 28 L. Ed. 1009; Ewerth v.

Robinson, 289 F. 740, 746-750. And there can be no

doubt that such an interest is property. Hamilton v.

Rathbone, 175 U. S. 414, 421, 20 S. Ct. 155, 44 L. Ed.

219; Bryan v. Kennett, 113 U. S. 179, 192, 5 S. Ct. 407,

28 L. Ed. 908. * * *

“While respondent does not own the ore deposits,

its right to mine and remove the ore and reduce it to

possession and ownership is property within the mean-

ing of the general provision. Obviously, as the process

goes on, this property interest of the lessee in the mines

is lessened from year to year, as the owner’s property |

interest in the same mines is likewise lessened. There

is an exhaustion of property in the one case as in the

other; and the extent of it, with the consequent deduc-

tion to be made, in each case is to be arrived at in the

same way, namely, by determining the aggregate

amount of the depletion of the mines in which the

several interest in here, based upon the market value

of the product, and allocating that amount in propor-

‘tion to the interest of each severally considered.”

(Italics ours.)

12

The United States Supreme Court expressly held that a

lease conferring upon the lessee exclusive possession and

the valuable right of removing and reducing ore to owner-

ship, created a very real and substantial interest therein.

The Commissioner again raised the question of economic

interest in the case of Palmer v. Bender, 53 S. Ct. 225; 287

U. S. 551, and again the United States Supreme. Court

decided against the Commissioner, and expressly held that

a lessee had an economic interest, and that the deduction

was not to be confined to those who are technical lessors.

The United States Supreme Court, in deciding against the

respondent, stated:

“It will be observed that the statute directs that

reasonable allowance for depletion be made as a

deduction in computing net taxable income, ‘in the case

of * * * oil and gas wells, * * * according to the peculiar

conditions in each case.’ The allowance to the tax-

payer is not restricted by the words of the statute to

cases of any particular class or to any special form of

legal interest in the oil well. It is true that under

article 215 of Treasury Regulations 62 the lessor of an

oil or gas well is entitled to a depletion allowance upon

the bonus and royalties received from the lessee. * * *

But there is nothing in the statute or regulations which

confines depletion allowances to those who are tech-

nically lessors. The concluding sentence of the section

that ‘in the case of leases the deductions allowed by

this paragraph shall be equitably apportioned between

the lessor and the lessee’ presupposes that the deduc-

tions may be allowed in other cases.” (Italics ours.)

The United States Supreme Court has, therefore, held

that the right to remove something of value from the lands

of another creates an economic interest. Under Pennsyl-

13

vania law, the lessee of coal lands or coal or culm banks

becomes the absolute owner of the coal contained therein

at the time of the execution of the so-called lease.

In the case of Boyle v. Coleraine Colliery Co., Appellant,

323 Pa. 224, the Court held that a lease of a culm bank

with the right to remove coal therefrom, constituted a

sale of the culm bank, and that the relationship of lessor

and lessee did not exist. The Court stated, page 229:

“In regard to the rails and ties found on the culm

banks, these also were not located on the demised

premises. The rights granted in regard to these banks

by the letters of February 10 and February 17, 1930,

while purporting to be a ‘lease’, constituted, in legal

effect, under well established authorities, a sale of the

culm in place to the extent removed by the grantee

during the term, and the relationship between the par-

ties as to such culm banks was therefore not that of

lessor and lessee: Tiley v. Moyers, 43 Pa. 404, 410;

Robinson v. Pierce, 278 Pa. 372, 375; Sturdevant v.

Thomson, 280 Pa. 233, 236.” (Italics ours. )

In the case of Smith v. Glen Alden Coal Company, et al.,

Appellants, 347 Pa. 290, the Court stated, page 298:

“It is settled in this State that a lease of coal in place,

such as this is, ‘until such time as all the available

merchantable coal shall have been mined and re-

moved’, is a sale of an estate in fee simple and leaves

the lessor with only an interest in the royalties to be

paid him under that lease. That interest is personalty.

This conclusion is supported by the decisions of this

court in Lillibridge v. Coal Co., 143 Pa. 293, 22 A. 1035;

Kingsley, et al. v. Hillside Coal & I. Co., 144 Pa. 613, 23

A. 250; Sanderson-v. Scranton, 105 Pa. 469; Hosack v.

Crill, 18 Pa. Superior Ct. 90; Webber v. Vogel, 189 Pa.

14

156, 42 A. 4; Gilberton Fuels, Inc. v. P. & R. C. & I. Co.,

342 Pa. 192, 20 A. 217 and many other cases * * *”

It is, therefore, respectfully submitted that the right to

remove coal, oil, gas or minerals from the lands of another

under United States Supreme Court decisions create an

economic interest and that under a long line of Pennsyl-

vania Supreme Court decisions a lease for a term of years,

giving lessee a right to remove coal, constitutes a sale of

the coal to the lessee and vests legal title in the lessee, and

that under Pennsylvania law, a lease of a coal bank or culm

bank with the right to remove coal therefrom constitutes

a sale of the culm bank. Since Petitioner lessee has the ex-

clusive right to remove and sell the coal from the coal bank,

it believes that under the above decisions it is clearly pos-

sessed of an economic interest.

(b) The second contention of the Commissioner is that

petitioner is not entitled to deduct percentage depletion be-

cause a culm bank is not a mine. The Commissioner reasons

as follows: Section 23 (m) of the Internal Revenue Code

provides for a deduction for depletion * * * in the case of

mines, oil and gas wells * * *. Since a culm bank is

not a mine, petitioner is not entitled to a deduction for

percentage depletion. The Commissioner has been continu-

ously raising this issue with little success until the United

States Court of Appeals, in the case of Chicago Mines Com-

pany and in the present case, agreed with him in a manner

expressly contrary to the decisions of this Court in the cases

of Herring vs. Commissioner (1934), 293 U. S. 322, 55 S. Ct.

179, and Douglas vs. Commissioner (1944), 322 U. S. 275,

64 S. Ct. 988.

The question of whether or not a coal bank is or is not

a mine or whether the removal of coal from a coal bank is

mining has absolutely no connection or relation with the

15

present issue involved, as this Court decided in the Herring

and Douglas cases, supra.

In considering the phrase “in the case of mines, oil and

gas wells * * *”, we immediately note that a mine is in-

volved; that Turkey Run Fuels, Inc. is the owner of a coal

mine.

The owner and lessor of the mining property is entitled

to a deduction for percentage depletion. The culm banks

and land overlying the coal mine are a part of the mining

property. No distinction in substance can be drawn be-

tween raw coal that has been hoisted and dumped on the

surface of the mining tract and raw coal lying in tunnels

beneath the surface, or raw coal that has been moved

through the tunnels to the foot of the shaft. It frequently

happens that months and even years intervene between

the time the coal is removed from beneath the surface of

the ground and when the same is cleaned, broken, sized

and sold. Underground mining operations may continue

steadily throughout the year, coal or ore being piled in

mountainous banks on the surface of the mining tract. In

many localities the operators, “owners, or lessees, licensees,

contractors” have only a few months during the summer

to wash the coal or ore, streams being frozen and it being

impossible to wash coal or ore during freezing weather.

The right to take a deduction for percentage depletion

does not arise until the coal or ore is sold. When an owner

of a mine, instead of preparing the coal for market himself,

selects a lessee to clean, break and size the coal for sale,

Sec. 23 (m) clearly states that the deduction for percentage

depletion shall be equitably apportioned between the mine

owner and the lessee. Capital is depleted when, and not

until the coal is loaded on cars and sold. At this time the

owner and lessee, by express statutory declaration, become

entitled to a deduction for depletion. This Court, there-

fore, found that the words of the statute mean that a deduc-

16

tion for percentage depletion shall be allowed to owners of

land under which lie mineral deposits, oil, gas, etc. This

Court held that an oil well need not be sunk or a mine be

in existence to entitle taxpayer to a deduction for deple-

tion. The statute provides that when the owner enters into

a lease of the mining property, the deduction for depletion

shall be allocated between the lessor and the lessee.

In the Herring case, supra, the taxpayers owned a cattle

ranch which they leased in 1926 for mining and operating

for oil and gas. Upon execution of the lease in 1926, the

taxpayers received $683,793.75 as a bonus or advance

royalty upon which they claimed a deduction for depletion.

At that time there were no wells on the leased lands and

none within three and one-half miles from such lands, and

it was not until four years later (1930) that any wells were

drilled upon the leased land. The taxpayers claimed a de-

duction for percentage depletion in the year 1926 upon the

amount of the bonus received, although there was no oil

well in existence and no production from any oil well.

Section 214 (c) (9) of the Revenue Act of 1926 granted:

“In the case of mines, oil and gas wells, other natu-

ral deposits and timber, a reasonable allowance for de-

pletion * * *,.”

Section 204 (c) (2) of the same Act provided for a deduc-

tion for percentage depletion, as follows:

“In the case of oil and gas wells, the allowance for

depletion shall be 2714 percentum of the gross income

from the property during the taxable year. * * *”

(Italics ours.)

The provisions of the 1926 Act are identical to the material

provisions of Section 23 (m) and Section 114 (b). The

17

lessors claimed a deduction for percentage depletion upon

the bonus received upon the execution of the oil lease.

The Commissioner contended that the statutory language

which granted a depletion deduction, “in the case of * * * oil

and gas wells,” necessarily excluded a case where there was

no well in existence and no production from any well. The

court held that the fact that no well was in existence did

not prevent the deduction, that a bonus or advance royalty

is income from the property, and as such is a proper basis

upon which to compute percentage deduction. The court

stated:

“A bonus is not proceeds from the sale of property,

but payment in advance for oil and gas to be extracted,

and is therefore taxable income. As such it is a part

of the ‘gross income from the property’ as the phrase is

used in section 204 (c) (2) to designate the base for the

application of the percentage deduction. From these

premises the petitioners argue that the bonus re-

ceived does not lose its character as income subject to

depletion, merely because it happens that in the year

of receipt there was no production of the depletable

asset.

“The respondent replies that the allowance for de-

pletion is a matter of grace, not of right, and that the

act fails to grant any allowance on income such as that

there involved. The argument is that in both the rele-

vant sections of the act, the statute says ‘in the case of

* * * oil and gas wells’ and this expression necessarily

excludes a case where no well exists. In support of this

asserted statutory exclusion it is urged that a deple-

tion allowance is essentially and exclusively reim-

bursement for wastage or exhaustion of assets, and

Congress could not have meant to permit an allow-

ance in any year in which there was no extraction of

18

oil or gas, and no practical assurance of production in

the future. We think these arguments cannot prevail

to defeat the petitioner’s right to the deduction.”

(Italics supplied.)

Following this quotation, the opinion sets out the Treas-

ury’s prior administrative views as to when and under what

circumstances a percentage depletion deduction was al-

lowable in regard to bonus payments and advance royalties,

mentions the decisions of the Board of Tax Appeals, and

then continues as follows:

“The situation presented by the administrative rul-

ings is this: A bonus is not a receipt from a sale of a

capital asset and may not be returned as such; it is

income in the year received; if any depletion is to be

allowed against the receipt, the allowance must be

claimed for the year of receipt; it cannot be allowed

in any later year; if the taxpayer computed depletion

upon the basis of cost on March 1, 1913 value he may

deduct depletion from a bonus payment, irrespective

of the sinking of a well or the production of any oil or

gas; if, however, he elects to avail himself of the alterna-

tive method of computing deduction at a percent of

gross income, though the nature of the deduction is

unchanged, he may not have any unless there be pro-

duction with the taxable year; if the production be but

trifling he may take a full percentage deduction upon

the entire bonus, however disproportionate the allow-

ance to the actual extraction of oil during the year.

To condition the allowance on actual production, how-

ever small, or the imminent probability of production,

and to deal in refinements as to the degree of prob-

ability of future production as in many cases to deny

any deduction where the taxpayer elects to compute

19

it under section 204 (c) (2) (flat percentage of gross

income from the property) and permit it where he

elects to compute it under section 204 (c) (on the basis

of cost). But the nature and the purpose of the allow-

ance is the same in both cases, and we find neither

statutory authority nor logical justification for with-

holding it in the one and granting it in the other; much

less for making the decision turn upon the circumstance

that no production is obtained within the year in which

the bonus is paid.” (Italics ours.)

The Supreme Court in the Herring case stated the test

is: Was income received from the mining property? It

specifically overruled the Commissioner’s contentions that

a mine must be in existence, and secondly, it must be pro-

ducing. The Court held that a bonus is a part of the:

“Gross income from the property’ as the phrase is

used in Section 204 (c) (2) to designate the basis for

the application of the percentage deduction.”

Since, therefore, it is immaterial whether or not a mine is in

existence, the question becomes even less material as to

whether or not a culm bank is a mine. Petitioner sold coal

out of a culm bank which was part of a mining property.

It paid royalties to the owner and lessor of the mine and

culm bank. The interests of the lessor and lessee were

depleted when the coal was removed and sold. The

amounts of money received by the lessee constituted gross

income from the property during the taxable year. The

test laid down by the United States Supreme Court is:

Was gross income received from the mining property dur-

ing the year? The answer is, “Yes.”

Section 114 (b) (4) (A) provides:

“(b) Basis for Depletion * * *

(4) Percentage depletion for coal * * *

(A) In General. The allowance for depletion under

Sec. 23 (m) shall be, in the case of coal mines, 5 per-

centum * * * of the gross income from the property dur-

ing the taxable year, excluding from such gross income

an amount equal to any rents or royalties paid or in-

curred by the taxpayer in respect of the property * * *.”

(Italics ours.)

Respondent contends petitioner is not engaged in mining.

This contention of the respondent was fully answered by

this Court in the Herring case, supra, and also in the case

of Douglas v. Commissioner (1944), 322 U. S. 275, 64 S. Ct.

988, 88 L. Ed. 1271, 32 AFTR 358. In that case the tax-

payers owned a mine which they leased to Republic Steel

Company on a royalty basis of 40 cents per ton, minimum

royalties at $20,000 for five years, $60,000 a year thereafter.

Lessee did not produce any ore. The Supreme Court re-

iterated the principle of the Herring case and held that

lessors properly took a deduction for depletion over the

years in which the minimum royalties were received.

Neither the lessee nor the lessor was engaged in mining

or producing ore. The rulings in the above entitled cases

are, therefore, contrary to the Commissioner’s contention

in the present case.

The Commissioner raised the same question in the case of

Commissioner v. Kennedy M. & M. Co., 9th Cir. 125 Fed.

(2) 399. In that case the Commissioner contended that

income from the workings of a tailings dump was not in-

come from mining. The tailings dump had been placed

upon the surface of the land by the taxpayer many years

previously. The Circuit Court stated, pages 400-401:

“The Commissioner contends that only so much of

the taxpayer’s income as was derived from newly

21

mined ores was income from the mine; and that, since

no net income was so derived, no deduction for deple-

tion was allowable.

“The Commissioner’s contention must be rejected.

The tailings from which the taxpayer derived part of its

gross income and all of its net income during 1935 and

1936 were ores. They were ores from the taxpayer’s

mine, just as were the newly mined ores which the

taxpayer treated in 1935 and 1936. Income derived

from the ores called tailings, as well as that derived

from the newly mined ores, was income from the mine.

“It is true, but not material, that the ores called tail-

ings were mined prior to 1935. The mining of ores and

the receipt of income therefrom are seldom, if ever,

simultaneous. The two events are usually months apart

and not infrequently years apart. Thus income from

a mine during a taxable year may, and usually does,

include income from ores mined prior to that year. * * *

“It is likewise immaterial that the subsequent treat-

ment of these ores (in 1935 and 1936) was in a cyanide

mill instead of a stamp mill. The right to deduct for de-

pletion of a mine a percentage of the gross or net income

therefrom does not depend upon the type of mill used

in treating the ores from which such income was de-

rived. Nor is the taxpayer’s right to the deductions

here claimed affected by the fact that, prior to 1934, it

claimed and was allowed deductions for ‘unit’ depletion

in accordance with Revenue Acts then in effect. Com-

missioner v. Elliott Petroleum Corp., 9 Cir., 82 F. (2d)

193.

“Atas Mining Co. v. Jones, 10 Cir., 115 F. (2d) 61,

cited by the Commissioner, is not in point. The tax-

payer in that case was a contractor which had con-

tracted with the owner of a tailings dump to treat the

tailings therein for a share of a proceeds. Neither

22

party to the contract owned any mine. The court held,

and rightly so, that income resulting from performance

of the contract was not income from a mine. (Italics

ours. )

“Decision affirmed.”

The Commissioner in the above case contended that in-

come from the sale of ores removed from a tailings dump

was not income from mining. The Court overruled the

Commissioner and stated:

“Income derived from the ores called tailings as well

as that derived from the newly mined ores was income

from the mine.” (Italics ours.)

From the doctrine of this case income derived by petitioner

from the sale of coal removed from a coal bank must be in-

come from the mine.

In the case of New Idria Quicksilver Mining Company v.

Commissioner of Internal Revenue, 144 Fed. (2) 918, the

facts were as follows:

New Idria Quicksilver Mining Company purchased a

metal mine on the surface of which was located an ore dump.

The ore dump had been placed on the surface of the ground

by a predecessor in title of New Idria. The New Idria Com-

pany, during the year in question, proceeded to remove the

ore from the dump and process the same. It conducted no

underground mining operations. The Circuit Court of Ap-

peals decided against the Commissioner and held the New

Idria Company was entitled to take a deduction for deple-

tion on the ores removed from the ore dump and processed

by it. The Court started at page 921:

“The second question for determination is whether

the New Idria Quicksilver Mining Company was en-

titled to claim percentage depletion on income derived

23

from mining dumps on its land. The ore in the dumps

had been milled years previously, but with the im-

proved furnacing process, it was possible to salvage

some of the ore. The dumps had always been a part

of the land and no depletion had ever been claimed.

This Court in Commissioner of Internal Revenue v.

Kennedy Mining & Milling Co., 9 Cir., 125 F. (2d) 399,

400, said that ‘tailings * * * were ores. They were ores

from the taxpayer’s mine, just as were the newly mined

ores.’ The Tax Court failed to distinguish the instant

case and the Kennedy case. There is no legal distinc-

tion between the rights of the successor in interest and

the rights of the original owner with respect to deple-

tion claimed. See also Consolidated Chollar, Gould &

Savage Mining Co. v. Commissioner of Internal Rev-

enue, 9 Cir., 133 F. (2d) 440.” (Italics ours. )

As the Circuit Court stated:

“There can be no legal distinction between the rights

of the successor in interest and the rights of the original

owner with respect to depletion claimed.”

When petitioner entered into its agreement of lease with

Turkey Run Fuels, Inc., it became the successor in interest

of the original owner and it acquired the rights of the owner

to remove the coal from the culm banks.

(c) The third contention of the Commissioner is that the

removal of coal from a culm bank, and the washing, break-

ing and sizing is not mining.

After various controversies as to the meaning of the term

“mining,” and as to the meaning of the term “gross income

from property,” Congress amended the Revenue Act of

1943 by adding subsection (B) thereto, which defined the

24

terms so that the Act now reads, Section 114 (b) (4) (A)

(B):

“A. The allowance for depletion under Section 23

(m) shall be in the case of coal mines, 5 percentum

* * * of the gross income from the property during the

taxable year. * * *

“B. Definition of gross income from property. As

used ... this paragraph the term ‘ gross income from the

property’ means the gross income from mining. The

term ‘mining’ as used herein shall considered to in-

clude not merely the extraction of the ores or minerals

from the ground but also the ordinary treatment proc-

esses normally applied by mine owners or operators

in order to obtain the commercially marketable min-

eral product or products. The term ‘ordinary treat-

ment processes’ as used herein shall include the fol-

lowing: (i) in the case of coal * * * cleaning, break-

ing, sizing and loading for shipment.” (Italics ours.)

Congress, therefore, by statutory definition broadened the

meaning of the word “mining” to mean not merely the ex-

traction of ores or minerals from the ground, but in the

case of coal the cleaning, breaking, sizing and loading for

shipment.

“The term ‘mining’ shall be considered to include * * *

(i) in the case of coal * * * cleaning, breaking, sizing

and loading for shipment.”

Since petitioner is engaged in the business of cleaning,

breaking, sizing and loading coal for shipment, it is engaged

in mining by express statutory congressional definition.

The respondent in the present case relies upon Atlas Min-

ing Company v. Jones, 10 Cir. 115 F. (2d) 61, but the Ninth

25

Circuit in Commissioner v. Kennedy M. & M. Co., supra,

properly stated:

“Atlas Mining Co. v. Jones * * * cited by the Com-

missioner is not in point. The taxpayer in that case was

a contractor which had contracted with the owner of

a tailings dump to treat the tailings therein for a share

of the proceeds. Neither party to the contract owned

any mine.” (Italics ours.)

In the present case the lessor is the owner of the under-

lying rr‘ 1e and the coal in the culm banks was removed by

the owner lessor and/or its predecessors and placed upon

the surface of the mining tract. The Atlas case can, there-

fore, have no bearing upon the present situation.

Respondent also relies on the case of Consolidated Chol-

lar, Gould & Savage Mining Company, 133 Fed. (2d) 440.

The deduction for percentage depletion was denied to the

taxpayer in that case because the ore dumps were not lo-

cated on the mining premises whereas in the present case

the coal banks are located on the surface of the mine from

which the coal was removed.

Respondent also relies on the case of Helvering v. Bank-

line Oil Company, 303 U. S. 362, 366 (1938). The Bank-

line Oil Company neither owned nor operated any gas

wells, neither was it lessor or lessee nor did it produce nor

did it have the right to compel production of any gas. It

was a processor. It purchased wet gas at the mouth of the

well from the owners and operators. This Court stated,

pages 367, 368:

“(5) It is plain that, apart from its contracts with

producers, respondent had no interest in the produc-

ing wells or in the wet gas in place. Respondent is a

processor. It was not engaged in production. Under

its contracts with producers, respondent was entitled

26

to a delivery of the gas produced at the wells, and to

the extract gasoline therefrom, and was bound to pay to

the producers the stipulated amounts. Some of the con-

tracts, reciting that the producer was the owner of the

gas produced, provided for its treatment by respon-

dent. Other contracts were couched in terms of pur-

chase. In either case the gas was to be delivered to

respondent at the casingheads or gas traps installed by

the producer. * * *”

This case can clearly have no application to the facts in

the present case. The Bankline Oil Company purchased

wet gasoline from various owners and operators, conveyed

the said gas to its refining plant and converted the same

into gasoline and illuminating gas. It suffered no depletion.

It was not an owner of a gas well, an operator, a lessor or

a lessee.

Since petitioner in the present case is a lessee in exclu-

sive possession of a coal bank and engaged in removing said

coal from the coal bank, and in cleaning, breaking, sizing,

and loading the same for shipment, its case is controlled by

Lynch v. Alsworth-Stephens Co., supra. and Palmer v.

Bender.

3. CONCLUSION.

It is, therefore, respectfully submitted in summary:

(a) Petitioner is the owner of an economic interest in

the coal contained in the culm banks (Lynch v. Allsworths-

Stephens; Palmer v. Bender; Kirby Petroleum v. Commis-

sioner, supra).

(b) It is immaterial whether or not a coal or refuse bank

is a mine or whether the removal of coal from a coal bank

27

is mining, the only question being whether or not income

was received from the property. The right to claim a de-

duction for percentage depletion does not depend upon the

existence of a mine (Herring case, supra) nor does it de-

pend upon whether or not the mine is in operation, nor upon

whether or not underground extraction is taking place

(Douglas case, supra, Kennedy case, New Idria case, supra).

(c) Washing, breaking and sizing coal is “mining” by

statutory definition. In the Kennedy Mining & Milling

Company case and the New Idria Quicksilver Mining

Company case the Court found that the processing of tail-

ings dumps constituted income from mining.

Accordingly, it is respectfully submitted that the record

in this case presents a federal question of substance af-

fecting the rights of owners and lessees of coal and metalic

mineral properties throughout the nation, which question

has been decided by the United States Court of Appeals for

the Third Circuit in conflict with a decision of the United

States Court of Appeals for the Ninth Circuit, and in a way

probably not in accord with the decisions of this Court, and

THAT THE PETITION FOR CERTIORARI SHOULD BE

GRANTED.

i.

ps)

Respectfully pranitied,

JAMES J. DOUGHERTY,

JOHN R. SCHOLL,

Counsel for the Petitioner.