Legal Document

380 U.S. 624 85 Supreme Court Reporter 1207 14 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 116 PARAGON JEWEL COAL COMPANY, Inc., Petitioner,v.COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER REVENUE, Petitioner, versus Robert Lee MERRITT et al. Nos. 134, 237. Argued March 8, 1965. Decided April 28, Frederick Bernays Wiener, Washington, D.C., for petitioner in Number 134. Philip baron Heymann, respondent 134 and the John Y. Merrell, D.C. respondents Mr. Justice CLARK delivered opinion of Court. 1 The issue these consolidated tax cases is whether lessee1 coal lands entitled to percentage depletion on all gross income derived from sale mined its leases, or contract miners who do actual mining acquired a depletable interest within meaning §§ 611 613(b)(4) Internal Revenue Code 1954 extent they were paid by lessee delivering it. 2 contractors, 237, claimed an allocable portion allowance years through 1956, while lessee, right entire deduction 1955 1957. In each case was denied taxpayer. However, Commissioner now takes position that allowance;2 Tax so held, 39 KF6280 A2 U55 257, but Appeals agreed with contractors. 330 Federal Reporter, 2nd 161. We granted certiorari 379 812, 43, 13 26, 886, 157, 91, them argument. have concluded correct reverse judgment Appeals. 3 parties agree principles our Parsons Smith, 359 215, 79 656, 747 (1959), are controlling here. There we held allowed recognition fact mineral deposits wasting assets intended as compensation owner part used production; there may be more than one same deposit, depends ownership economic place since statute makes available only capital such deposit; and, finally, legal form unimportant long it constitutes regard place. 4 problem arises applying those 'according peculiar conditions case.'3 contractors contend made investment because nature their expenditures preparation performance oral agreements which claim mine certain designated areas exhaustion. They could look extraction return investment, thus test supra, satisfied. 5 Paragon, other hand, says Congress never evidenced statutory enactments adopted subsequent involved supra; lease lessor no longer relegated gains treatment only.4 And, equipment depreciated not constitute required under supra. 6 taxpayer legally enforceable share value deposit has this had unmined coal. 7 THE FACTS. 8 Paragon took assignment written leases obligated pay annual minimum cash royalties, tonnage land taxes, 85% minable tracts. It substantial investments processing marketing coal, including construction tipple, power line, railroad siding four spurs purchase equipment. also built road tipple circled mountain close outcrop line This truck contractors' mines Paragon's tipple. 9 various individuals firms allocated leases. at own expense deliver fixed fee per ton mining, less 1/2% rejects. understood might vary time time—and did so—depending somewhat general trend market price over extended periods some labor costs. any changes always prospective, being notified several days advance change knew amount would get upon delivery. After delivery contractor further control responsibility fixing price. earned payable even know sold. 10 buy rate put diesel engine generator compressors. A engineering services inside mine. An engineer provided map out show particular direction his take, locations adjacent mines, etc. single utilized ensure run into rendered unrecoverable haphazard methods. Periodically, enginer extend projections order keep contractor's original location. 11 Because deposits, necessary use drift-mining method5 requires opening two parallel tunnels, ventilation working space removal type operation roof supported leaving pillars erecting wooden supports about every 18 inches.6 withdraw where seam been exhausted, take remove pillars, recovering last bit method often six eight weeks develop point can operated profitably. 12 here encountered 'a sandstone roll' rock 'squeezes' When situations must move large amounts reach seam. During period, course, receiving money merchantable tipple.7 At times, water accumulate pumped before work resume. Again, received nothing clearing operation. removed placed bins entrance later trucked connecting roadway then taken latter's mined. If facilities full moment fill shut down record shows deliveries anyone Paragon. Although said contracts regarding receive depletion, found expected per-ton mind. silent termination apparently indefinite period. numerous quit sold equipment, buildings, tracks, etc., others. Under agreements, ceasing operate anticipated continue profitable proper methods met standards. obligation specific specifically given area 15 privilege coal; title either after mined; none royalty taxes leases; sublease, co-adventure, partnership. Their sole based roadways, buildings costs mine, instances, installation track admit, however, removable, save neither represented appreciable expendiure. All deducted direct costs, development depreciation assets. 16 On basis facts matter law contracts. accepted Court's findings latter erred conclusions. reversed 'performing constituted ample consideration' together 'continuing produce therefor closely related price' give 'an (bringing) rationale Smith * *.' 163 F.2d. believe error doing. 17 STATUTORY PROVISIONS FOR DEPLETION. purpose compensate exhausted production, when minerals gone, owner's remain unimpaired. Cannelton Sewer Pipe Co., 364 76, 81, 80 1581, 1584, 1581 (1960). Percentage first came structure 1926 consistently regarded legislative grace.8 We, therefore, provisions regulations effect during determine 19 Section 611(a) provides reasonable according case; prescribed Secretary pertinent regulation states: 20 '(1) Annual deductions standing timber. possessed timber secures, relationship, severance timber, he capital. But person does possess merely contractual relation possess(es) mere pecuniary advantage production. For example, agreement between another entitling process product production cutting convey interest. *' Treas.Reg. § 1.611 1(b)(1). 21 611(b) estabishes equitable apportionment nin lease. read light 631(c)9 disposes retains shall instead royalties contract. result typical lessor-lessee situation property. Respondent make contention lessees sublessees 22 somehow enunciated Palmer Bender, 287 551, 557, 53 225, 226, 77 L.Ed. 489 (1933), become touchstone decisions determining eligibility party allowance. developing bring cases. completely settles question against them. 23 Parsons, enumerated seven factors considered coal-mining gave were: 24 (the miners') movable—not place; (2) recoverable depreciation—not depletion; (3) terminable without cause short notice; (4) landowners surrender actually miners) (5) mined, belonged entirely landowners, sell landowners; (6) proceeds but, contrary, sum *; (7) miners), thus, sums due contracts.' 225 U.S., 663 25 present ruled therefore controlled. 26 contrary Court, will continuing price.' decision operators 'large preparing respective sites mining' '(i)t inequitable indeed hold benefit operators' efforts cause.' regret unable agree. 27 expressly terminate mentioned parties. noted, 'the fix exhaustion.' fact, many chose. say allow thereby impose people forfeit 28 event, exhaustion, more, owner, deposit.' Helvering Bankline Oil 303 362, 367, 58 616, 618, 82 897 (1938). 29 court below indicated disagreed conclusion set level chose agreements. stated 'to varied 'there (was) evidence directly getting sales changeable Paragon.' (Emphasis supplied.) T.C., 282. examination record, conclude times retained will, rely personal covenant posted insufficient. As 226 'has acquired, oil place, oil, capital.' Here, bound regardless condition looked solely abide covenant. 30 Act buttressed language Treasury Regulations which, provide extration* interest.' almost verbatim 618 (1938), incorporated 1939, major economic-interest-versus-economic-advantage paragraph. Compare 103, 19.23(m)—1; 111, 29.23(m)—1; 118, 39.23(m)—1(a)—(b), Regulation survived successive amendments great weight. 31 Further, additional support enactments. noted above, retaining received. exemptive 631(c)10 excludes co-adventurer, partner principal permitting secure depletion. 'Owner' defined subsection 'any owns sublessor.' While certainly comes exemption claim, nor contention, 'co-adventurer, partner, principal.' contrast 631(c), treating 631(b) 'owner' instance sublessor holder cut timber.' phrase included 631(c) indicating include miners. Clearly what wished holders 631(c). 32 Nor Southwest Exploration 350 308, 76 395, 100 347 (1956), undercut conclusion. State California State's offshore extracted wells drilled filled slant upland drill submerged deposits. Pursuant entered owners whereby event awarded surface base derrick drilling reaching leased premises. consideration assigned owners, net profits recovered. sine qua non Southwest's securing State. conditioned essential sufficient obtaining investment. Here statute; whatever wholly disassociated it; contractors; payment.11 33 reasons reversed. ordered. 34 Judgments 35 GOLDBERG, whom BLACK joins, dissenting. 36 & N Dec. Immigration Nationality Decisions respectfully dissent. cannot accept formalistic view 1954, 611, 613, 614, applied case, coal-bearing land. lands, whose total consist promise small produced, apportioned company digging maintaining basically simple one: purposes Code, should viewed independent selling entrepreneurs participating joint venture contributes open mines? formal arrangements underlying realities clear far closer entrepreneur seller services. reason (mineral), depleted production,' 227, 489, fairly proportioned 37 factual presented different 747. persons contracting strip-mine comparatively little mines. obtained strip-mining consists removing earth lies uncovered. petitioners mechanical shovels, trucks bulldozers, 'was movable usable elsewhere strip purposes.' 219, 660. primarily roadbuilding firm. insisted days' notice since, "* if opportunity opened up, (it) wanted go back building," id., 216, 658, shovels bulldozers designed. both very notice. Thus strippers clearly hired stripping, 38 deep underground instant drift, rather strip, mining. Unlike contractor, begin immediately overburden employee shovel, driftmine employ number spend months operations shafts, building spur, shoring unmarketable entries, cross sections, rooms air courses, Normally marketable reached production1 stage. Moreover, stage reached, face prepare support, frequently spent excavating worthless 'rolls' nonmarketable excess activity considerable Kyva Standard, partnerships here, state challenge end invested machinery, $33,263.81 $26,901.30, respectively. expenses year were, respectively, $76,036.64 and.$73,214.02. representing making ready exploitation designed work, consisted notice, 161, 163. circumstances undeniable time, labor, extract mineral, pooled resources, funds, energies supplied hold, Appeals, well fit rule followed cases,2 40 tries assimilate stating terminated rators veins facts, reveal steps, slightest information anyone's practical count vein remained slightly Additionally, exhaustion,' F.2d, Whether actions results is, law. absence exceptional circumstances, accepts determinations members local scene we, questions General Box States, 351 159, 165, 728, 732, 1055; Allegheny County Frank Mashuda 360 185, 191, 1060, 1064, 1163; Ragan Merchants Transfer Warehouse 337 530, 534, 69 1233, 1235, 93 1520. reliance able most surprised courts, lower drastically deliberately drive business. differs unmovable until attempt recover profit. operator itself terminability free unrelated opportunities. 41 result, relies 1.611—1(b)(1) 897. With deference bears significantly presented. entirety '(a)n *. production.'3 indicates asked significant think recited processor natural gas mouth rights whatsoever prior wet pipe line," 'had deposit,' place.' 368, 618. taxpayer's facilitating produced gas, function gas,' G.C.M. 22730, 1941—1 Cum.Bull. 214, 220, enforcible well,4 adequately distinguish us. 42 find virtually indistinguishable 347. Exploration, uplands next drillers Though lay owners' land, sites. contributed entitle(d) (them) received.' 317, S.Ct., 400. Exploration. contribution oil. dependent recoupment bought indication And mine—not machinery moved 43 attempts draw (c) showing congressional intent These apportioning consideration. passive kinds interest, interests like case—interests quite unlike owned here—will income. See S.Rep.No. 781, 82d Cong., 1st Sess., U.S.Code Congressional Administrative Service, Page 1969. 631(b), lengthy subsection, states '(f)or term means definition, terms, applies section bearing arising royalties. To allowance, excluded coverage treatment, '(t)his apply realized word definition meant exclude operators, arise my view, sentence job do, falls scope 'income partners, coal.' 43.5 44 Even assume definitions sections dealing intend grant '(A) timber' 631(b)'s crystal H.R.Rep. 1337, 83d 59. similar provision miner, brought 631(c); felt similarly treated gain; Committee 631 drafted. relevance defines 'who place' (emphasis added), controlling. 45 Finally, argued permit double recovery argument overlooks too cent amortization allowances addition kind lessors cents coal.6 fully deductible Despite deduction, affirmatively 611(b)(1). Perhaps allowing inequitable, us question. 46 properly operators. employees perform man mow lawn, shovel snow, individual meet undisputedly (coal), production.' 489. While, clearly, 'phrase 'economic interest' embracing 897, derive refuse recognize blind following form, accept.7 are, sellers equally unrealistic. sound Appeals—the come areas—that investors accordance Congress, require permitted Jewel Coal assignee sublessee case. significance convenience referred throughout opinion. neutral contended I.R.C.1954. KF62 (1958 ed.). I.R.C. Drift horizontal away mountainside bulldozer. Two openings One entry course ventilate drift driven up prevents cave-ins safety requirements, federal, done miners' expense. least occasion shared cost incident going roll unusual proportions, practice. cited n. 5, 659, text see 10, infra. period read: 'In disposal (including lignite), disposal, thereof virtue difference adjusted plus disallowed taxable 272 though gain loss, be, Such 613 respect 'owner sublessor. date deemed income, allowable rents determined subsection. application, subchapter G, relating corporations avoid shareholders 535(b)(6) 545(b)(5)).' interesting note amended 1964 domestic iron ore 400: 'We decide where, indispensable real property entitles him applicable stage, 1.616—2(b). See, e.g., Burton-Sutton Revenue, 328 25, 32, 66 861, 865, 90 1062; Kirby Petroleum 326 599, 603, 409, 411, 343; O'Donnell, 370, 371, 619, 620, 903; Thomas Perkins, 301 655, 661, 57 911, 913, 81 1324. reads follows: 'Annual corporation shareholders.' discussion, 642. points principal' Ante, 637. engaged understandable exact issue: $4 $5 rejection 'substantial Boston M.R. 868.

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