Legal Document

68 United States Supreme Court Reports Lawyer’s Edition 2d Series KF101.8 U54 454 101 Reporter 1931 451 U.S. 571 UNITED STATES, Petitioner,v.Elwood SWANK et al. Number 79-1515. Argued Dec. 9, 1980. Decided May 18, 1981. Syllabus Held: The "percentage depletion" allowance under §§ 611 and 613 of the Internal Revenue Code 1954—whereby owner an economic interest in a mineral deposit is allowed special deduction from taxable income measured by percentage his gross derived exhaustion mineral—may not be denied to respondent lessees underground coal who had right extract sell at prices fixed them, paying royalty per ton their lessors, merely because leases were subject termination lessor on 30 days' notice. Pp. 576-585. (a) provides incentive for engaging mining business that goes well beyond purpose allowing wasting asset recoup capital invested asset, hence eligibility determined amount investment but mine operator's "economic interest" coal. question here whether depleted respondents will received anyone, since tax consequences lessors' receipt royalties affected, either favorably or unfavorably, decision. 576-579. (b) Under leases, legal both before after it was mined, free whatever price market could bear. Thus, they depletable deposits, advantage." Parsons versus Smith, 359 215, 79 656, 3 747, Paragon Jewel Coal company Commissioner, 380 624, 85 1207, 14 116, distinguished. Nor does terminate give only significant as matter "practical economics." It no means certain increase induce satisfactory relationship, would unfair deny lessee benefit available competitors simply he accepted risk able avoid when negotiated leases. Moreover, Government has suggested any rational basis linking depletion period time taxpayer operates mine. mere existence unexercised respondents' did destroy leased deposits. 579-585. 221 Ct.Cl. 246, 602 Federal Reporter, 2nd 348, affirmed. Stuart Atlantic Washington, D. C., petitioner. LeRoy Katz, Bluefield, W. Va., respondents. Justice STEVENS delivered opinion Court. 1 mineral. This deduction, codified 1954, designed compensate such owners place.1 case presents must otherwise eligible 2 arises out three different refund suits decided Claims single opinion. 348. controlling facts are essentially same all cases. Each operated pursuant written lease; exchange ton, granted lessee. lease contained clause permitting In fact, however, none lessors exercised right; each mined substantial tonnage during uninterrupted operation continued several years. proceeds sale represented revenue which recovered paid lessors. cases, additional help illuminate issue. Black Hawk2 continue "during term commencing first day March, 1964, terminating LESSEE shall have exhausted Feds Creek (or Clintwood) Seam coal, . until said tenancy earlier terminated. ." App. 77a. required Hawk pay 25 cents $5,000 year, whichever larger. Id., 77a-78a. addition, taxes its plant equipment 79a. independent contractors remove party obtain. seam exhaustion, operating continuously 13 70a-71a. stipulated sole claimant deduction; claim been made contractor employed Hawk. 71a. 4 Swank involves two separate executed Northumberland County, Pa., mines land owned county. lease, deep-mining terminated 1968 mountain slide forced close 52a. second, strip-mining 1966, still being Swank's successor 1977 tried. During years dispute, payments county rate 35 amounted $7,545.10 1966 $6,854.05 1967. 53a. depletion, based significantly larger.3 record also indicates sums construction access roads, acquisition equipment, purchase improvement "tipple"—the surface structure used slate rock product sort into specific sizes marketing. 55a-56a. 5 Bull Run4 5-year 1967 renewed 1972. 90a-91a. Unlike other gave if willing meet lessee's price, year dispute Run. Ct.Cl., 249, n. 4, F.2d, 350, 4. not, limit set selling others more than lessor. Ibid. Like Hawk, provided ton. 91a. As true Swank, there suggestion part issue this case.5 See id., 92a. Run like others, provision giving cancel days notice.6 6 * Since 1913 predecessors deductions assets. We explained these resting "on theory extraction minerals gradually exhausts deposit," therefore permits "a recoupment owner's so exhausted, unimpaired." Commissioner Southwest Exploration Co., 350 308, 312, 76 395, 397, 100 L.Ed. 347.7 allowance, clearly method enabling operator recover unmined Because computed with reference investment, line asset.8 supra: 7 "The present bears little relationship limited original investment. continues long extracted, even though money actually deposit. 1939 [the forerunner statute] solely congressional grace. U.S., S.Ct., 397.9 8 Hence coal.10 9 A recognition recovery cost especially case. anyone.11 our decision case.12 contending wrong claiming allowance. Rather, takes position lessee-operator cancellation short notice.13 II 10 language statute makes minimum duration deposits may base depletion.14 relevant Treasury Regulation requires coal.15 That broadly defined regulation follows: 11 "(b) Economic interest. (1) Annual standing timber. An possessed every acquired place timber secures, form severance timber, look return capital."16 12 Government's argument deprived advanced forms. First, notes distinguishes advantage"17 interest," argues cases—Parsons 116 concluded advantage" rather deposits—support conclusion Second, economics" gives Neither submission persuasive. covered consolidated cases similar facts. coal-bearing entered contract providing strip-mine deliver contracts purported third parties. 216-219, 658-659. terminable notice terminability one seven factors listed support coal.18 perfectly clear, reached factor present. much those Parsons, except dealt instead agreed own expense Paragon's tipple fee ton.19 control over delivery Paragon, responsibility fixing know sold 628, 1209. stated took 15 "only legally enforceable share value miners coal." 627, 1208. 16 coal: 17 "Here, bound posted regardless condition particular thus looked abide covenant." 635, 1212. 18 Thus agreements dispositive factor,20 neither answers narrow us case.21 19 contrast between stark. Whereas never Indeed, contend that, absent clauses, contrast, seems clear miners' insufficient term. 20 Government, argue alone taxpayers' tenuous defeat deduction.22 According "assuredly" lead exercise lessor's terminate; accordingly, controlled find theoretical unpersuasive least reasons. 21 relatively small element total cost.23 Therefore, increases, cannot negotiate favorable another quantity extracted important Purely matter, relationship. evidence record—the history operations many years—tends belie entire argument.24 22 standpoint fact conduct prolonged continuous operation, seem him risk—the termination—that unlikely Congress intended availability greatest bargaining power. 23 Third, most important, If authorization sound policy, policy equally conducted series taxpayers successive shorter periods. reason why efficient removal great less should slower period.25 24 correctly judgment 26 WHITE, whom STEWART joins, dissenting. 27 today rejects Service's interpretation applicable "suggested mine." Ante, 585. suggests "whether periods." My disagreement Court's simple. function speculate deserves allowance; duty determine reasonable one. my view statutory provisions attendant acceptable, & N Immigration Nationality Decisions dissent. 28 assets, order "the up production." Helvering Bankline Oil 303 362, 366, 58 616, 617, 82 897 (1938). justification permit resources exhausted. 347 (1956); Cannelton Sewer Pipe 364 76, 81, 80 1581, 1584, 1581 (1960). manner calculating changed closely tied underlying recouping party's immaterial convenience "in way alter[s] fundamental allowance." Oil, supra, 367, 618. essence, therefore, "right" properly predicated some indication place. 29 From earliest dealing § 613, recognized "capital investment" Palmer Bender, 287 551, 557, 53 225, 226, 77 489 (1933), stated: broad enough provide, least, acquired, oil place, oil, capital." (Emphasis supplied.) 31 Other expressed somewhat terms noting exists critical distinction possessing entitles advantage, entitle 618 (" 'economic interest' taken embracing advantage production, through contractual relation owner, deposit"); Kirby Petroleum 326 599, 603, 66 409, 411, 90 343 (1946). 32 true, Court, specifically refer leasehold qualify But Service promulgated fully adopted advantage-interest" noted opinions: 33 capital. person possess possesses pecuniary production. For example, agreement entitling latter process upon production compensation cutting convey Treas.Reg. 1.611-1(b), Regulations 1.611-1(b) (1980) (emphasis supplied). 34 prior regulation's explicit acceptance economic-interest standard proper afforded weight reviewing court. given effect Commissioner. Fulman States, 434 528, 533, 98 841, 845, 55 (1978); Bingler Johnson, 394 741, 749-750, 89 1439, 1445, 695 (1969); South Texas Lumber 333 496, 501, 695, 698, 92 831 (1948). Here, imposing requirement entitlement indicated encompassed requirement. versions expressly applied See, e. g., 632, 1211, (1965). Furthermore, although self-defining, authority interpret apply regulation. done various interpretative decisions expertise determining statute.1 company's lands run straightforward simple ownership variety lesser interests down nonexclusive tenant will. assured reasonably time. Accordingly, believes revocable create sufficient justify taking 36 entitled deference. Ford Motor Credit Milhollin, 444 555, 566, 790, 797, 63 ("[a]n agency's regulations regarded due [considerable respect]"); Bowles Seminole Rock Sand 325 410, 413-414, 65 1215, 1217, 1701 (1945) (courts "administrative meaning words doubt" "controlling unless plainly erroneous inconsistent regulation"). Fribourg Navigation 383 272, 300, 86 862, 877, 751 (1966) (WHITE, J., dissenting) (given Secretary delegate, primary what constitutes 'reasonable' depreciation," courts affirm Commissioner's "adopts consistent behind depreciation intent, Regulations"). Of course, Rulings documents do force Regulations. mean disregarded feels reasonable, where application National Muffler Dealers Assn. 440 472, 99 1304, 59 519 (1979), deference phrase regulation, advantages dependent activity "line business." concept" involved case, business" open interpretations. Rulings, see 483-484, 1310, fashion. upheld administrative concept, 37 "In short, while reading 501(c)(6) perhaps possible one, bear fair statute, reflects views sought enactment, matches articulated. evolved administered attempted new content reflect design. stood 50 years, infrequently consistently interpreted exclude organization Association industrywide. merits serious deference." 484, 1310 38 view, posture identical Muffler. acknowledged require deference, chooses it. note majority lower considered question.2 39 concern nature light regard, 747 (1959), (1965), provide examples suggesting exists. asserted rested entirely contracts. found them "were completely without cause notice." 224, 662. Jewel, companies silent regarding apparently indefinite period. obligation area exhaustion. held receive 40 None reasons forwarded rejecting irrelevant determination rights leasehold. anything more, "does constitute 'a deposit.' " 634-635, 1212 (quoting 618). Both make itself, how structures costs mining, doing business, deductible expenses depreciable parts Code, themselves serve 630-631, 1210-1211; 224-225, 662-663.3 41 market, goes, "at risk" respect market. To sure, nor situation obviously, importance, then opinions drastically simplified. marketing system, preclude do, peculiar rewrite determines factor. focus scheme permitted far sensible duration-of-the-lease Market conditions change, drastic changes predictably result cancelled. mercy Respondents reliance illusory willingness happen beside point. What matters absolutely 30-day light, within bounds concluding demonstrated 42 susceptible differing 1-day expectation Perhaps created long-term guaranteed grey between, minds differ possessed. mind, focusing applying requirement, insisted continuity rights. point, believe long-held courts, can hardly irrational. dissent nothing substitution deems wholly provisions. plain recovering tax-free, ephemeral precisely kind unjustified undeserved windfall, we contrary informed Service. "§ 611. Allowance "(a) General Rule mines, gas wells; natural computing improvements, according case; prescribed Secretary. KF62 611(a). 613. Percentage wells, subsection (b), section percentage, specified property excluding equal rents incurred property. Such exceed percent taxpayer's (computed depletion). section. rates percentages, referred "(4) "Asbestos, brucite, lignite, perlite, sodium chloride, wollastonite." 613(a), (b)(4). Corp., Inc., drift Pike Ky. Its suit 1970-1972. states claimed $41,371.24 $15,204.32. Brief 3. 8a-9a. No Swank. Mining West Virginia. brief, September 1978. Respondent 2. $39,981.41 1974, question. provides: "5. CANCELLATION. parties thirty (30) effective date cancellation. period, given, expiration days, Lessee agrees possession premises Lessor. Upon becoming effective, Lessor track, conveyors, dumps, bins, motors affixed premises, agree compensation, four (4) months cancellation." 96a. 897, "is assets illustrative deduction. roughly 21,557 tons 19,585 about $1.92 78 Inasmuch income, figures—which suggest almost high $20 ton—indicate lack raw Act 1918, "discovered." ch. 214(a)(10), 234(a)(9), Statutes-at-Large 1068, 1078. Although 1926, 27, 204(c), 44 (part 2) 16, 1932, 209, 114(b)(4), 47 169, 203, 366-367, 617-618, "[t]he granting arbitrary altered 1918 developed test 489. Palmer, 226. erred consequence 351; 22-23. 631(c) treat gain, Section pertinent part: disposal (including lignite), iron ore disposal, thereof virtue retains ore, difference realized adjusted plus disallowed 272 gain loss, be, ore. co-adventurer, partner, principal word 'owner' owns including sublessor." (1976 ed., Supp. III) added). gains treatment directly related cost, basis, royalty, course recoups mined. sense, receives "cost depletion." $7,545.10; remainder $41,371.24. amounts dispute. argument, indicate characterized "congressional grace," 12, infra. conceded oral depletion. Tr. Oral Arg. 16. nevertheless retained 16-18. take hold involve notice, advises cancellable year's 8. genesis G.C.M. 26290, 1950-1 Cum.Bull. 42, declared obsolete, Rev.Rul. 70-277, 1970-1 280. 74-507, 1974-2 179. 1, supra. early mines: "It is, review title unextracted .; conferring exclusive valuable removing reducing ownership, very real therein. And doubt property." Lynch Alworth-Stephens 267 364, 369, 45 274, 275, 69 660. (1980). example advantage": "[A]n interest." paragraph: "To recapitulate, fiction opposed petitioners' investments movable—not place; (2) recoverable depreciation—not depletion; (3) ; landowners surrender petitioners (5) times, belonged landowners, keep landowners; (6) but, contrary, sum delivered, was, Huss, 'full full performance work furnishing [labor] work'; (7) petitioners, thus, become delivering 'was personal covenant purport grant [petitioners] [coal place].' O'Donnell, 370, 372, 619, 620, 903. Surely show in, acquire fictionally having so." 663 varied depending general trends labor costs, always prospective, notified advance change knew get delivery." With issue, mentioned agreement, will, power imputed Paragon. indicated, "right Parsons." 634, Another distinguishing feature really presented respecting taxpayer—the miner lessee—should 626, 630, 1208, 1210; 639-649, 1214-1219 (Goldberg, dissenting). surely bearing "Although potential rise practical economics compel conclude arrangement dictate." 19. "As pointed (supra, page 19), rises above assuredly enter profitable himself circumstances, unilateral assume complete unfettered dominion deposit, viz., profound significance, than, below erroneously (Pet.App. 5a), 'mere existence.' 21-22 (footnotes omitted). payment approached 8, weakness argument. court counsel increased markedly. argued reluctant continuing existing usually great, comparatively, difficult obtain leases." 351, 9. accept representations contains contradict explanation type regularly cancelled recent years." geared perceive impose requirements admittedly depleting leaseholder leaseholder's allow 74-506, 178-179 (6-month anticipated exhaust interest). 77-341, 1977-2 204-205. 1-year renewable purposes obtaining Code. 42. focused Marketing schemes indicia determination. Whitmer 443 170, 173 (CA3 1971) (right "would appear fatal ability granted"); McCall 312 699, 705 (CA4 1963) ("[w]here lessee, feature"); Stallard, 273 847, 851 1959) (the producer completion empowering will"); Weaver 72 Tax KF6280 A2 U55 594, 606 (1979) ("a ousted immediately nominal Mullins 48 571, 583 (1967) repeatedly obtained place"); Bolling 754 (1962). Costantino 445 405, 409 1971); Mammoth 229 535 1956); Usibelli 539 (CA9 1955); Holbrook 415, 418-421 (1975). sure contrary. Winters 496 995 (CA5 1974); Bakertown 485 633, 202 842 (1973). obscure members Fifth Circuit panel existed purchased necessary justified. 247 (1956). follow because, "fatal 77-481, 205-206. consider gains. III). serves considers account year. taxed pro rata extracted. impairment substantially akin specious, event, immaterial. benefits entitlements, legislative 631, 219, 659; 618; Anderson Helvering, 310 404, 408, 60 952, 954, 84 1277 (1940); 397. law right,

Classification Label: 11