Opposition Brief — Kohinoor Coal Co. v. Commissioner

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INDEX

Page

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Jurisdiction ....... eee ry ae Pee eee hho ha wn aba cae 1

Question presented ......... LV VOR ERCRRT RG CNALECEEO Cees 2

Statute and regulations involved ........... ce cesses 2

Statement ....... nh ae bah ew kee ae eie e's eee ere 2

ET ShGCNEs £6 sO soe Oka whese Chee Lae es pak eee ue ene 3

ED ibis ig wh bn dekh bake sAeS Reedu kek eam phe 8

DE Ach KARes Aika Wke eee Rk aneues SO ou Rae ba ate ke 9

_CITATIONS

Cases:

Atlas Milling Co. v. Jones, 115 F. 2d 61, certiorari

A Wk WUD Sawa GSE Ne vm okte cee une caves 5

Chicago Mines Co. v. ae, 164 F. 2d 785, cer-

Gorari denied, 888 U. B. GB1 oo... ce deckccccccses 5, 6

Commissioner v. Kennedy ine & M. Co., 125 F. 2d 399 6, 7

oy yy Chol. G. & S. M. Co. v. Commissioner, 133 .

Douglas v. Scken, 329 Uz s. 275 ee 4,6, 7

Helvering v. Bankline Oil Co., 303 U. S. 862 .......... 5

Herring Vv. Commissioner, 293 U. S. 322 .............. 6, 7

Kirby Petroleum Co. v. Commissioner, 826 U. S. 599.. e, 6,7

Lynch v. Alworth-Stephens Co., 267 U. S. 864 ........ 6

Manhattan Co. v. Commissioner, 297 U. S. 129 ........ 4

Maryland Casualty Co. v. United States, 251 U. S. 342 4

New ge Quicksilver Min. Co. v. Commissioner, 144 .

Palmer v. ete: ae ME iis

Statute:

Internal Revenue Code:

Sec. 23 (26 U.S.C. 1946 ed., Sec. PD ohsiinaicas cack gs

Sec. 114 (26 U.S.C. 1946 ed., Sec. Beer Mi cascsees 6-7, 9

Sec. 322 (26 U.S.C. 1946 ed., Sec. 322) .......... 3

Miscellaneous:

Treasury Regulations 111, Sec. 29.28 (m)-1 .......... 4, 11

(I)

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Inthe Supreme Gourt of the Winited States

OcToBER TERM, 1948

No. 724

Koxrvoor Coan COMPANY, PETITIONER

vw.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the Tax Court (R. 8-9) is a mem-

orandum opinion and therefore not officially

reported. The opinion of the Court of Appeals

(R. 80-90) is reported in 171 F, 2d 880.

JURISDICTION

The judgment of the Court of Appeals was en-

tered on December 20, 1948. (R. 90). A petition

for rehearing was denied on January 13, 1949.

(R. 105). The petition for a writ of certiorari was

filed on April 13, 1949. The jurisdiction of this

Court is properly invoked? under 28 US.C., See-

tion 1254,

1 The taxpayer is in error in stating that the jurisdiction of

this Court is invoked under 28 U.S.C., Section 344 (b).

(Pet. 4.)

(1)

ca

.

QUESTION PRESENTED |

Whether the taxpayer as lessee of culm or refuse |

banks of an anthracite coal mine is entitled to a

deduction for depletion under Section 23 (m) of

the Internal Revenue Code.

STATUTE AND REGULATIONS INVOLVED

The statute and regulations involved are set

forth in the Appendix, infra, pp. 9-12.

STATEMENT

The facts, which were stipulated (R. 10-37), and

as found by the Tax Court (R. 8-9) are substan-

tially as follows:

The taxpayer, a Pennsylvania corporation, filed

its returns for the years in question with the Col-

lector of Internal Revenue for the Twelfth District

of Pennsylvania. (R. 8.)

The taxpayer entered into an agreement with

Turkey Run Fuels, Inc., on February 11, 1941,

whereby it leased from Turkey Run, the owner, |

culm or refuse banks of material which Turkey |

Run had theretofore thrown aside in the operation

of its anthracite coal mines. The lease was to run

for ten years or a shorter period if the marketable

coal was exhausted from the refuse piles sooner.

The taxpayer was to pay an annual rental of $24,-

000 and was granted the right to remove all coal

from the refuse piles. It also agreed to pay all

taxes on improvements and on the coal shipped,

but not on the lands. The taxpayer erected various

buildings and installed machinery and equipment

er

ee tt =

—

and began operations. It extracted coal from the

refuse piles pursuant to the lease during the tax-

able years. (R. 8-9.)

In its return for the fiscal year ended June 30,

1943, the taxpayer computed depletion on a per-

centage basis, and claimed a deduction of about

$22,000 (R. 12); in its return for the fiscal year

ended June 30, 1944, the taxpayer elected to take

depletion on a percentage basis, but did not claim

the deduction because the question was being con-

tested by the taxpayer for earlier years (R. 13,

60). After the Commissioner disallowed the de-

duction for depletion for the taxable year ended

June 30, 1943, and determined a deficiency upon

other grounds for the fiscal year ended June 30,

1944 (R. 6), the taxpayer filed a petition for review

of the Commissioner's determination with the Tax

Court covering both years (R. 2-6)?

3

The Tax Court decided that the taxpayer was

not entitled to a deduction for depletion (R. 8-9)

and the Court of Appeals affirmed that decision

CR. 80-90).

ARGUMENT

The Court of Appeals was clearly correct in

denying to the taxpayer an allowance for depletion

With respect to its extraction and processing of

coal from culm or refuse banks which it had leased

* Since the taxpayer did not claim the deduction for deple-

tion in its returm for the year ended June 30, 1944, that year

involves an overpayment, See Section 322 (d) of the Internal

Revenue Code (26 U.S.C. 1946 ed., See. 322),

a =

4

for that purpose from another taxpayer which

owned and operated the coal mine. The deduction

for depletion permitted by Section 23(m) of the

Internal Revenue Code (Appendix, infra) is, so

far as here relevant, limited to ‘“‘mines... and ..

other natural deposits,’’ and provides that the

allowance for depletion is ‘‘in all eases to be made

under rules and regulations to be prescribed by the

Commissioner.’’ Section 29.23(m)-1 of Treasury

Regulations 111 (Appendix, infra) provides in

pertinent part that ‘‘the owner of an economic

interest in mineral deposits’”’ is allowed depletion

deductions. A ‘‘mineral deposit” is defined as

‘minerals in place.’’* A culm bank is clearly not

a ‘‘natural deposit” or ‘minerals in place.”’

The rationale of the statute and the regulation is

not obscure. A ‘‘mineral deposit in place”’ repre-

sents a reservoir of capital investment of one who

either owns such deposit or who has such an “‘eco-

nomic interest’’ in it as to amount to a capital

investment. His capital investment is depleted as

the natural deposit is depleted. In such a case,

the mineral deposit in place is recognized as a

wasting asset of the taxpayer, and the depletion

allowance is intended as a compensation for the

part of his capital used up in production. See

*The Regulations, unless in conflict with the statute, have

the foree of law. Maryland Casualty Co. v. United States, 251

U.S. 342, 349; Manhattan Co. vy. Commissioner, 297 U.S. 129,

134; Douglas v. Commissioner, 322 U.S. 275, 280. The tax-

payer does not contend that there is such a conflict.

ae

lpm .

5

Kirby Petroleum Co. v. Commissioner, 326 U. S.

599, 602-4.

It is plain that this rationale has no application

to a taxpayer in the situation of the Kohinoor

Company. It has no ownership, no capital invest-

ment and no economie interest of any description

in the mineral deposit in place which suffered

depletion—i.e., the coal mine owned by Turkey

Run Fuels. The courts have repeatedly recog-

nized that the deduction to compensate for the de-

pletion of a capital investment in a natural re-

source was never intended to be granted to a

taxpayer who is merely processing the output of a

mine owned and operated by another taxpayer.

Helvering v. Bankline Oil ( ’0., 303 U. S. 362, 367 ;

Consolidated Chol. G. & 8S. M. Co. v. Commissioner,

133 F. 2d 440 (C. A. 9); Atlas Milling Co. v. Jones,

115 F. 2d 61 (C. A. 10), rehearing denied, 115 F. 24

64, certiorari denied, 312 U, S. 686 ; Chicago Mines

Co. v. Commissioner, 164 F. 2d 785 (C. A. 10), eer-

tiorari denied, 333 U. S. 881. Kohinoor, as the Tax

Court pointed out, ‘‘is recovering all of its actual

costs through deductions for the rent under the

lease, for depreciation of its physical equipment,

and for its costs of operation. * * * there would be

no reason to suppose that Congress intended a tax-

payer like this one to have a deduction for deple-

tion in view of the fact that it never had any cost

to recover.”’ (R. 9).

The cases which the petitioner cites as being in

conflict with the decision of the Court of Appeals

— meinen

6

are plainly distinguishable. Most of them involved

taxpayers who owned the mine or other natural

deposit in question. Herring v. Commissioner, 293

U. S. 322; Douglas v. Commissioner, 322 U. 8. 275;

Kirby Petroleum Co. v. Commissioner, 326 U. 8S.

599; Commissioner v. Kennedy Min. & M. Co.,

izo F. 2d 399 (C. A. 9); New Idria Quicksilver

Min. Co. v. Commissioner, 144 F, 2d 918 (C. A. 9).

The other two are simply holdings that lessees of a

mine and an oil well, respectively, who were en-

gaged in extracting the minerals from their nat-

ural deposits, had in the particular circumstances

of each case such an ‘‘economic interest’’ in min-

eral deposits in place as to entitle them to depletion

allowances. Lynch v. Alworth-Stephens Co., 267

U. S. 364; Palmer v. Bender, 287 U. S. 551. As

above indicated, Kohinoor neither owns, leases,

nor has any other economic interest in a mineral

deposit in place.

A ease which is not only in point but on all fours

with the present one is Chicago Mines Co. v. Com-

missioner, 164 F. 2d 785 (C. A. 10), certiorari de-

nied, 333 U. 8. 881.4. There, as here, the taxpayer

had no economic interest in any mine or other nat-

ural deposit, but had simply leased and reworked

a refuse heap previously extracted from a mine

owned by another taxpayer. There, as here, the

taxpayer argued that the provisions of Section

* The exactness of the parallel between the present case and

the Chicago Mines case was recognized by both courts below

and by the petitioner. (R. 9, 87-88; Pet. 14).

ae

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7

114(b) (4) of the Internal Revenue Code (Appen-

dix, infra) broaden the meaning of the term

‘‘mines’’ in Section 23(m) to include culm or re-

fuse banks.* There, as here, the taxpayer’s peti-

tion for certiorari asserted that the decision of the

Court of Appeals was inconsistent with the deci-

sions of this Court in the Herring, Douglas and

Kirby cases, supra, and in conflict with the deci-

sions of the Court of Appeals for the Ninth Cir-

cuit in the Kennedy and New Idria cases, supra.

There this Court denied certiorari; and there is no

new circumstance here which would justify a dif-

ferent disposition.

* Section 114(b) deals with the basis for depletion and does

not come into play unless the taxpayer has an economic in-

terest in a mine or natural deposit within the meaning of

Section 23(m). Subsection (B) of Section 114(b) (4), added

by Section 124 of the Revenue Act of 1943, simply defines

““gross income from the property’’ to mean “*gross income

from mining’’ ineluding in the term *“mining’’ not merely

extraction of the mineral from the ground but also the proc-

esses normally applied by mine owners or operators to make

such mineral commercially marketable—in the case of coal,

cleaning, breaking, sizing and loading for shipment. It is

plain that Congress did not by this amendment intend to ex-

tend the benefits of Section 23(m) to every taxpayer engaged

in such processing, regardless of whether he had any economic

interest in a mine.

CONCLUSION

The decision of the court below is correct, and

there is no conflict of decisions. The petition for

a writ of certiorari should be denied.

Respectfully submitted,

_ Pup B. Peritman,

_ Solicitor General.

- Tueron Lamar CAUDLE,

Assistant Attorney General.

E.uis N. Siack,

- Morton K. Roruscuixp,

JosepH W. Bisuop, JR.,

Special Assistants to the

Attorney General.

—— ecninnetres.ath one HO Se ee canal

——E gy

APPENDIX

Internal Revenue Code:

SEC. 23. DEDUCTIONS FROM GROSS

INCOME.

In computing net income there shall be al-

lowed as deductions:

* * * * a

(m) Depletion—In the case of mines, oil

and gas wells, other natural deposits, and

timber, a reasonable allowance for depletion

and for depreciation of improvements, accord-

ing to the peculiar conditions in each case ;

such reasonable allowance in all cases to be

made under rules and regulations to be pre-

scribed by the Commissioner, with the ap-

proval of the Secretary. * * * In the ease of

leases the deductions shall be equitably appor-

tioned between the lessor and lessee. * * *

* * * * *

(26 U.S.C. 1946 ed., See. 23.)

SEC. 114. BASIS FOR DEPRECIATION

AND DEPLETION.

* * * * *

(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, ex-

cept as provided in paragraphs ( 2), (3),

and (4) of this subsection.

* * * * *

(4) [as amended by Section 145 of the

Revenue Act of 1942, ¢. 619, 56 Stat. 798.

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and Section 124 of the Revenue Act of |

1943, ¢. 63, 58 Stat. 21].—Percentage de-

pletion for coal * * * mines * * *,—

(A) In General.—The allowance

for depletion under section 23 (m)

shall be, in the case of coal mines,

5 per centum * * * of the gross in-

come from the property during the

taxable year, excluding from such

gross income an amount equal 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 in-

come of the taxpayer (computed

without allowance for depletion)

from the property, except that in

no ease shall the depletion allowance }

under section 23 (m) be less than

it would be if computed without ref-

erence to this paragraph. :

(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 minerals

from the ground but also the ordi-

nary treatment processes normally

applied by mine owners or operators

in order to obtain the commercially

marketable mineral product or prod-

ucts. The term ‘‘ordinary treatment

processes’’, as used herein, shall in-

clude the following: (i) In the ease

of coal—cleaning, breaking, sizing,

and loading for shipment; * * *

(26 U.S.C. 1946 ed., See. 114.)

NS SAR CR NN EIEN ae

10

11

Treasury Regulations 111, promulgated under

the Internal Revenue Code:

SEC, 29.23(m)-1. Depletion of Mines, Oil

and Gas Wells, Other Natural Deposits, and

Timber; Depreciation of I m provements.—

Section 23 (m) provides that there shall be

allowed as a deduction in computing net in-

come in the case of mines, oil and gas wells,

other natural deposits, and timber, a reason-

able allowance for depletion and for deprecia-

tion of improvements. Section 114 prescribes

the bases upon which depreciation and deple-

tion are to be allowed.

Under such provisions, the owner of an

economic interest in mineral deposits or

standing timber is allowed annual depletion

deductions. An economic interest is pos-

sessed in every case in which the taxpayer

has acquired, by investment, any interest in

mineral in place or standing timber and se-

cures, by any form of legal relationship, in-

come derived from the severance and sale of

the mineral or timber, to which he must look

for a return of his capital. Buta person who

has no capital investment in the mineral de-

posit or standing timber does not possess an

economic interest merely because, through a

contractual relation to the owner, he possesses

a mere economic advantage derived from pro-

duction. Thus, an agreement between the

owner of an economic interest and another en-

titling the latter to purchase the product upon

production or to share in the net income de-

rived from the interest of such owner does not

convey a depletable economic interest.

* * * * *

12

When used in these sections (29.23(m)-1

to 29.23(m)-28, inclusive) covering depletion

and depreciation—

* * * 7 *

(b) A ‘‘mineral property’’ is the mineral

deposit, the development and plant necessary

for its extraction, and so much of the surface

of the land only as is necessary for purposes

of mineral extraction. The value of a min-

eral property is the combined value of its

component parts.

(c) The term ‘‘mineral deposit’”’ refers to

minerals in place. The cost of a mineral de-

posit is that proportion of the total cost of

the mineral property which the value of the

deposit bears to the value of the property at

the time of its purchase.

(d) ‘‘Minerals”’ include ores of the metals,

ma?"

* ¥ * * *

wy U. S. Government Printing Office, 1949 J837839/629