# Opposition Brief — Kohinoor Coal Co. v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1949
- **Citation:** 337 U.S. 924

## Text

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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
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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.

. ee Seat: we tee ee Fe SPOR IES
ATS RA ERI Bae gs Tea ae

|

|
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_2129%3A2. Public record. Not legal advice.