Court Opinion

ID: 9428336
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:23:27.772692+00
Date Added: 2024-06-11T17:23:12.927298
License: Public Domain

Affirmed. Justice White,
with whom Justice Stewart joins, dissenting.
The Court today rejects the Internal Revenue Service’s interpretation of §§611 and 613 and the applicable regulation because it has not “suggested any rational basis for linking *586the right to a depletion deduction to the period of time that the' taxpayer operates a mine.” Ante, at 585. The Court suggests that depletion tax policy should be the same “whether the entire operation is conducted by one taxpayer over a prolonged period or by a series of taxpayers operating for successive shorter periods.” Ibid. My disagreement with the Court’s opinion is simple. It is not our function to speculate on who deserves an allowance; our duty is to determine if the Service’s interpretation is a reasonable one. Since in my view the construction of the statutory provisions and the attendant regulation is clearly acceptable, I dissent.
Congress has provided for a depletion allowance in recognition of the fact that mineral deposits are wasting assets, in order to compensate “the owner for the part used up in production.” Helvering v. Bankline Oil Co., 303 U. S. 362, 366 (1938). The theoretical justification for the allowance is that it will permit an owner to recoup his capital investment in the minerals as the resources are being exhausted. Commissioner v. Southwest Exploration Co., 350 U. S. 308, 312 (1956); United States v. Cannelton Sewer Pipe Co., 364 U. S. 76, 81 (1960). The fact that the manner of calculating the depletion allowance has changed and is not that closely tied to the underlying justification of recouping a party’s capital investment is immaterial since the method of calculating the deduction is a matter of convenience and “in no way alter [s] the fundamental theory of the allowance.” Bankline Oil, supra, at 367. In essence, therefore, any “right” to a depletion allowance under the statute is properly predicated on some indication of capital investment in the minerals in place.
From the earliest cases dealing with the statutory predecessors of § 611 and § 613, this Court has recognized the “capital investment” theory underlying the depletion allowance. In Palmer v. Bender, 287 U. S. 551, 557 (1933), the Gourt stated:
“The language of the statute is broad enough to provide, *587at least, for every case in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of the oil, to which he must look for a return of his capital.” (Emphasis supplied.)
Other cases have expressed the capital investment theory in somewhat different terms by noting that there exists a critical distinction between possessing an economic interest in the minerals in place, which entitles a party to the depletion allowance, and possessing a mere economic advantage, which does not entitle one to the allowance. See Bankline Oil, supra, at 367 (“ 'economic interest’ is not to be taken as embracing a mere economic advantage derived from production, through a contractual relation to the owner, by one who has no capital investment in the mineral deposit”); Kirby Petroleum Co. v. Commissioner, 326 U. S. 599, 603 (1946).
It is true, as recognized by the Court, that the statute does not specifically refer to a minimum- duration of a leasehold to qualify a lessee to an allowance. But it is also true that the Service has promulgated a regulation which has fully adopted the “economic advantage-interest” distinction noted in the Court’s earlier opinions:
“(b) Economic interest. (1) Annual depletion deductions are allowed only to the owner of an economic interest in mineral deposits or standing timber. An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the extraction of the mineral or severance of the timber, to which he must look for a return of his capital. ... A person who has no capital investment in the mineral deposit. . . does not possess an economic interest merely because through a contractual relation he possesses a mere economic or pecuniary advantage derived from production. For ex*588ample, an agreement between the owner of an economic interest and another entitling the latter to purchase or process the product upon production or entitling the latter to compensation for extraction or cutting does not convey a depletable economic interest. ...” Treas. Reg. § 1.611-1 (b), 26 CFR § 1.611-1 (b) (1980) (emphasis supplied).
Under the Court’s prior cases, the regulation’s explicit acceptance of the economic-interest standard is proper and must be afforded substantial weight by a reviewing court. A regulation adopted pursuant to a statute must be given effect if there is a reasonable basis for the interpretation given by the Commissioner. See Fulman v. United States, 434 U. S. 528, 533 (1978); Bingler v. Johnson, 394 U. S. 741, 749-750 (1969); Commissioner v. South Texas Lumber Co., 333 U. S. 496, 501 (1948). Here, imposing an economic-interest requirement for any entitlement to a depletion allowance is clearly reasonable given that our prior cases have indicated that the statute encompassed such a requirement. Indeed, earlier versions of the same regulation have been expressly accepted and applied by the Court. See, e. g., Paragon Jewel Coal Co. v. Commissioner, 380 U. S. 624, 632 (1965).
Furthermore, although the term “economic interest” is not self-defining, the Service has the authority and the responsibility to interpret and apply the economic-interest standard contained in its own regulation. It has done so through various interpretative decisions and has concluded in the exercise of its expertise that the duration of the leasehold interest is a critical factor in determining a lessee’s right to a depletion allowance under the statute.1 A coal mining company’s in*589terest in the coal lands may run from a straightforward fee simple ownership to a variety of lesser interests down to a nonexclusive right to extract coal as a tenant at will. The Service is of the view that a taxpayer operating pursuant to a lease must be assured of a right to continue mining for a reasonably long period of time. Accordingly, the Service believes that a lease which is revocable on short notice does not create a sufficient economic interest to justify the taking of a depletion allowance.
The Service’s interpretation of its own regulation is entitled to deference. See Ford Motor Credit Co. v. Milhollin, 444 U. S. 555, 566 (1980) (“[a]n agency’s construction of its own regulations has been regarded as especially due [considerable respect]”); Bowles v. Seminole Rock & Sand Co., 325 U. S. 410, 413-414 (1945) (courts must look to “administrative construction of the regulation if the meaning of the words used is in doubt” and give it “controlling weight unless it is plainly erroneous or inconsistent with the regulation”). See also Fribourg Navigation Co. v. Commissioner, 383 U. S. 272, 300 (1966) (White, J., dissenting) (given that Congress gave to “the Secretary of the Treasury or his delegate, not to this Court, the primary responsibility of determining what constitutes a 'reasonable’ allowance for depreciation,” courts should affirm the Commissioner’s position *590when he “adopts a rational position that is consistent with the purpose behind the depreciation deduction, congressional intent, and the language of the statute and interpretative Treasury Regulations”). Of course, Revenue Rulings and other interpretative documents do not have the same force as Treasury Regulations. But this fact does not mean that the consistent interpretation of the Service may be disregarded because the Court feels another interpretation is more reasonable, especially in cases like the present where the interpretation involves the application of terms expressly used in the regulation. Indeed, in National Muffler Dealers Assn. v. United States, 440 U. S. 472 (1979), the Court afforded substantial deference to the Service’s interpretation of a phrase in a regulation. Under the relevant regulation, certain tax advantages were made dependent on whether a particular activity was in a “line of business.” Like the “economic interest” concept involved in this case, the meaning of “line of business” was open to different interpretations. The Commissioner, as expressed in a variety of Revenue Rulings, see id., at 483-484, had defined “line of business” in a narrow fashion. The Court upheld the administrative interpretation of the “line of business” concept, and stated:
“In short, while the Commissioner’s reading of § 501 (c)(6) perhaps is not the only possible one, it does bear a fair relationship to the language of the statute, it reflects the views of those who sought its enactment, and it matches the purpose they articulated. It evolved as the Commissioner administered the statute and attempted to give to a new phrase a content that would reflect congressional design. The regulation has stood for 50 years, and the Commissioner infrequently but consistently has interpreted it to exclude an organization like the Association that is not industrywide. The Commissioner’s view therefore merits serious deference.” Id., at 484 (emphasis supplied).
*591In my view, the posture of the present ease is identical to that of National Muffler. Here, the acknowledged standard of an economic interest contained in the regulation has been interpreted by the Service to require a lessee to possess a lease which is not terminable at will on short notice. This consistent interpretation of the applicable regulation is entitled to deference, which the Court today chooses not to give it. It is also significant to note that this interpretation has also been accepted and applied by the majority of the lower courts that have considered the question.2
*592The Service’s concern with the nature of the underlying lease in determining whether an economic interest exists is also reasonable in light of our prior cases. In this regard, Parsons v. Smith, 359 U. S. 215 (1959), and Paragon Jewel Coal Co. v. Commissioner, 380 U. S. 624 (1965), provide two examples suggesting that the duration of a leasehold interest is an important factor in determining whether an economic interest exists. In Parsons, the Court noted that the interest asserted by the mining contractors rested entirely on the contracts. The Court found that the mining contracts did not entitle them to a depletion allowance since the contracts “were completely terminable without cause on short notice.” 359 U. S., at 224. In Paragon Jewel, a lessee made agreements with various companies to mine the coal. The agreements were silent regarding termination and were apparently for an indefinite period. The contractors were under no obligation to mine any specific amount of coal and were not given the right to mine any area to exhaustion. The Court held that the mining companies had no right to receive a depletion allowance.
None of the reasons forwarded by the Court for rejecting the Service’s view is persuasive. The fact that respondents did in fact mine to exhaustion is irrelevant to a determination of the legal rights underlying the leasehold. Indeed, the right to mine to exhaustion, without anything more, “does not constitute an economic interest under Parsons, but is ‘a mere economic advantage derived from production, through a contractual relation to the owner, by one who has no capital investment in the mineral deposit.’ ” Paragon Jewel, supra, at 634-635 (quoting Bankline Oil, 303 U. S., at 367). Both Paragon Jewel and Parsons also make clear that the fact of coal mining itself, regardless how great the cost of *593the equipment or structures required to mine the coal, is irrelevant to the determination whether a mining company is entitled to a depletion allowance. The costs of mining, like the costs of doing any business, are deductible as business expenses or are depreciable expenses under other parts of the Code, and do not themselves serve to create an economic interest in the minerals in place. Paragon Jewel, supra, at 630-631; Parsons, supra, at 224-225.3
In essence, the Court argues that because respondents own the coal and sell it on the open market, they must have an interest in the mineral in place. Accordingly, so the argument goes, they are entitled to a depletion allowance be*594cause they were “at risk” with respect to the market. To be sure, neither Parsons nor Paragon Jewel involved a situation where the mining concern sold in the open market. But obviously, if the relationship to the market was the sole factor of importance, then the opinions in those two cases could have been drastically simplified. The Court could have stated that the marketing system, in and of itself, was such as to preclude the taking of the depletion allowance. This the Court did not do, and I find it peculiar that the Court today chooses to rewrite those cases in light of what it determines to be the more important factor. Indeed, the Court’s focus on the marketing scheme for determining whether a depletion allowance should be permitted is far less sensible than the Service’s duration-of-the-lease requirement. Market conditions may change, and drastic changes could predictably result in the leases being cancelled. A company with an assured right to mine the coal for a term is not at the mercy of the lessor. Respondents had no such right and their reliance on the market for economic return on their investment is therefore illusory since it is dependent on the lessor’s willingness to permit continued extraction of the coal. The fact that in these particular cases this did not happen is beside the point. What matters is that respondents had absolutely no legal right to mine coal beyond the 30-day period provided in the leases. In this light, the Service was well within, bounds in concluding that they had not demonstrated an economic interest in the mineral in place.
Of course, the question of what constitutes an economic interest is susceptible to differing interpretations. A 1-day lease would clearly not give the mining company any reasonable expectation of economic interest in the minerals in place. Perhaps equally clear is the fact that such an economic interest would be created by a long-term lease where the lessee has a guaranteed right to mine an area to exhaustion. In the grey area in between, reasonable minds could differ on the nature of the interests possessed. In my mind, the Service *595has reasonably interpreted the acknowledged and accepted distinction between economic interest and economic advantage by focusing on the duration of the leasehold interest. In applying the economic-interest requirement, the Service has reasonably insisted upon some enforceable expectation of continuity in mining rights. It may well be that the Service could have concluded otherwise in the present cases. The point, however, is that the Service believes that a lease which is terminable on 30 days’ notice without cause is not long enough to create an economic interest. Because I believe that the Service’s long-held view, accepted by most lower courts, can hardly be considered to be irrational, I dissent from the Court’s opinion which is nothing more than a substitution of what it deems meet and proper for the wholly reasonable views of the Internal Revenue Service as to the meaning of its own regulation and of the statutory provisions. It is also plain enough to see that with the owner recovering his investment tax-free, allowing depletion to these respondents with no more than an ephemeral interest in the coal is precisely the kind of an unjustified deduction, an undeserved windfall, that we should not require contrary to the informed views of the Service.

 The position of the Service is that in order for a leaseholder to qualify as possessing an economic interest in the mineral deposit, the leaseholder’s “right to extract must be of sufficient duration to allow it to remove a substantial amount of the mineral deposit to which it would look for a *589return of its capital.” Rev. Rui. 74-506, 1974r-2 Cum. Bull. 178-179 (6-month lease where it was anticipated that the period was sufficient to exhaust a mineral deposit did provide a sufficient economic interest). See Rev. Rui. 77-341, 1977-2 Cum. Bull. 204-205. The Service has also indicated that a 1-year lease which was renewable unless terminated for cause was sufficient for a coal mining lessee to acquire an economic interest for the purposes of obtaining a depletion allowance under § 613 of the Code. See Rev. Rui. 74-507, 1974-2 Cum. Bull. 179. See also G. C. M. 26290, 1950-1 Cum. Bull. 42. Thus, contrary to the Court’s view, the Service has not focused on the duration of the lease as the only relevant factor. Marketing schemes and other indicia of economic ownership are also relevant in the determination.

 See, e. g., Whitmer v. Commissioner, 443 F. 2d 170, 173 (CA3 1971) (right of lessor to terminate at will “would appear to be fatal to a lessee’s ability to claim the depletion deduction, because no right to extract until exhaustion of the coal has been granted”); McCall v. Commissioner, 312 F. 2d 699, 705 (CA4 1963) (“[w]here the contract is terminable at will, at least by the owner or long-term lessee, that feature is the determining feature”); United States v. Stallard, 273 F. 2d 847, 851 (CA4 1959) (the most important factor “is whether the producer has the right under the contract to exhaust the deposit to completion or is subject in this respect to the will of the owner through a provision in the agreement empowering the owner to terminate the contract at will”); Weaver v. Commissioner, 72 T. C. 594, 606 (1979) (“a miner who can be ousted immediately or on nominal notice from a mineral deposit at any time without cause is not really an owner of any economic interest in the deposit”); Mullins v. Commissioner, 48 T. C. 571, 583 (1967) (courts have repeatedly held that “the right to mine to exhaustion or for a specific period is the critical factor in determining whether a lessee has obtained a depletable economic interest in the mineral in place”); Bolling v. Commissioner, 37 T. C. 754 (1962). See also Costantino v. Commissioner, 445 F. 2d 405, 409 (CA3 1971); Commissioner v. Mammoth Coal Co., 229 F. 2d 535 (CA3 1956) ; Usibelli v Commissioner, 229 F. 2d 539 (CA9 1955); Holbrook v. Commissioner, 65 T. C. 415, 418-421 (1975).
To be sure there is authority to the contrary. See Winters Coal Co. v. Commissioner, 496 F. 2d 995 (CA5 1974); Bakertown Coal Co. v. United States, 202 Ct. Cl. 842, 485 F. 2d 633 (1973). The decision in Winters Coal is obscure because two members of the Fifth Circuit panel held that an economic interest existed for the reason that the taxpayer had purchased surface access rights which were necessary to mine the coal, and given this investment, a depletion allowance was justified. See Commissioner v. South*592west Exploration Co., 350 U. S. 308 (1956). The Service indicated that it would not follow Bakertown Coal because, in its view, the terminability of a lease was “fatal to a claim of an economic interest . . . .” Rev. Rul. 77-481, 1977-2 Cum. Bull. 205-206.

 Nor is it of any consequence that the owners of the land may not be able to take advantage of the percentage allowance provided by § 611 and § 613 even if the lessees are held not to be entitled to it. Under the Code, the owners are entitled to another favorable tax treatment permitting them to consider royalty payments as capital gains. See 26 U. S. C. § 631 (c) (1976 ed., Supp. III). The tax treatment under § 631 (c) serves the same function as the depletion allowance at issue in this case since the amount which the owner considers as capital gain takes into account his adjusted depletion basis in the coal extracted during the year. Thus, the owner is taxed under the favorable capital gain method only on the difference between the amount realized less the adjusted depletion basis, which is the pro rata cost to the taxpayer of the coal extracted. It is clear, therefore, that § 631 (c) permits the owner to recoup his capital investment without impairment under a method substantially akin to cost depletion. It is specious, therefore, to argue that respondents are entitled to a depletion allowance because the owners are denied one since the owners in fact receive a benefit similar to a depletion allowance.
In any event, even if the owners were denied a depletion allowance, this fact would be immaterial. Tax benefits are not entitlements, and it has been specifically noted that the provision of a depletion allowance is solely a matter of legislative grace. Paragon Jewel, 380 U. S., at 631; Parsons, 359 U. S., at 219; Bankline Oil, 303 U. S., at 366; Anderson v. Helvering, 310 U. S. 404, 408 (1940); Commissioner v. Southwest Exploration Co., supra, at 312. The only relevant question is whether under the present law respondents qualify under the statute in their own right, and not with respect to the independent tax treatment of the lessors.