Court Opinion

ID: 4484292
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:38.768006+00
Date Added: 2024-06-11T15:03:41.286867
License: Public Domain

Hall, J., concurring in part and dissenting in part: While I concur in the remainder of the majority opinion, I respectfully dissent from so much of the opinion as holds that section 631 mandates the disallowance of deductions for royalties paid by a lessee under a mineral lease before it is subleased or there is any agreement to sublease it. As the majority opinion points out, the statutory scheme grants to the lessor capital gains treatment on the profitable sale of coal in which he has an economic interest, but what would otherwise be his ordinary deductions are converted by section 272 into a setoff against his gain. A lessee, on the other hand, does not enjoy capital gains treatment but retains his normal deductions. Naturally, this raises the question of the taxpayer who is both lessee and, by virtue of a sublease, lessor. The statutory answer, explained in regulations section 1.631-3(b)(3)(ii)(a), is that he is treated as a lessor. The difficulty I have with the majority opinion is its construction of the statute as authorizing the disallowance of deductions earned while petitioner was a lessee but not yet a lessor, simply because of his subsequent entry into a sublease, albeit pursuant to his normal business practice. In the absence of a very clear statutory mandate, or at the least a regulation, to the contrary, I do not think we should permit subsequent events retroactively to reverse a deduction which was clearly allowable on the facts existing at the moment it was originally earned. The introduction of hindsight criteria for deductibility is unnecessary, is highly unusual, and in the chance case of the intervention of the end of a taxable year between the payment and the subsequent sublease, would fall afoul of the annual accounting period concept. Of course, if there were evidence of artificial manipulations to take inappropriate advantage of these statutory provisions, other issues would be presented which are not involved here and which we do not presently need to decide. But on the present record, I would allow deductions for amounts paid by Cumberland as lessee before it subleased to Western Coal. It was Cumberland’s practice to execute subleases in due course, but there is no finding of any contractual obligation to do so. At the moment the royalty payment was made, Cumberland was not yet a sublessor and I see no warrant in the statute or regulations for treating it as if it were.