Court Opinion

ID: 4480583
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:24.997579+00
Date Added: 2024-06-11T14:53:40.011959
License: Public Domain

Drennen, J., dissenting: I agree with the majority that petitioners are entitled to a deduction for depletion with respect to the coal mined from the Blair and Clintwood leases, but I respectfully disagree with the conclusion that petitioners are not entitled to a deduction for depletion with respect to the coal mined from the Bolling lease. The issue between us is definitely pointed up by the statement in the majority opinion, “In our view a lessee cannot acquire by investment an interest in the coal in place when any interest he has in the coal is terminable by the lessor at will or on short notice * * It is clear from the majority opinion that in their view petitioners had all the same requisites for the allowance of a depletion deduction under the Bolling lease as they had under the Blair and Clintwood leases except for the termination clause in the Bolling lease. I agree that the presence of a clause permitting the lessor to terminate the lease without cause on short notice is an important factor to be considered in determining who has the requisite economic interest in the coal under a lease or contract but I do not think it is conclusive, as does the majority.1 In my opinion we should look to the overall purpose of the depletion statute, and all the circumstances of the particular transaction, to determine how much weight to give to the termination clause in determining who had the economic interest in the mineral deposit. The percentage depletion deduction is geared primarily to production ; it is allowable as a percentage of the gross income from the property, sec. 613(a), I.R.C. 1954, which is defined in section 613(c) (except in the case of oil and gas) as “the gross income from mining.” Under the Bolling lease, as under the other two leases, petitioners were the only persons who could have any “gross income from mining” the coal that they mined under the lease, except possibly for the royalty paid to the lessor (against which the depletion deduction is not allowed under section 631(c) — see Paragon Jewel Coal Co. v. Commissioner, 380 U.S. 633). Petitioners were not mining the coal for the lessor, as was the situation in the Paragon case and many of the contract miner cases which have given rise to so much litigation in this area of tax law in recent years. Under the Bolling lease petitioners were entitled to mine all the merchantable and minable coal under the leased area (unless and until the lease is terminated by the lessor), they were obligated to pay all the costs of mining plus a tonnage royalty on the coal mined, they had complete title to the coal once it was removed, and they were entitled to sell it to whomever they wanted at whatever price they could sell it for. In other words they were required to look to the extraction of the coal and the sale thereof for a return of their investment and their profit; they were not required to deliver all the coal mined to the lessor for a fixed price or fee per ton. If the only question here was whether the lessor or the lessees were entitled to the depletion deduction, I would have no hesitancy in saying that the lessees were entitled to it. This is because I think the lessor surrendered all or a part of his economic interest in the coal under the Bolling tract Ito the lessee while the lease was in effect; and we are concerned with depletion on coal that was mined while the lease was effective. But there is no question that the case law and the 'Commissioner’s regulations have engrafted on the requirements of the law that to be entitled to a deduction for depletion the taxpayer must have an economic interest in the mineral deposits. I agree with the majority that the petitioners had an economic interest in the coal underlying the Blair and Clintwood leases, for the reasons stated in the opinion. I cannot agree that they had any less economic interest in the coal underlying the Bolling lease; the only difference was that their interest under the Bolling lease was subject to divestment if the lessor exercised his right to terminate. Until such time as the lessor exercised that right, in my opinion petitioners had such an economic interest in the coal deposit that would support the depletion deduction. If the lessor exercised his right to terminate, the entire economic interest would then revert to the lessor. But we are not here concerned with coal mined after that time. This suggested shifting of the economic interest in a mineral deposit is not unusual. Under the pertinent regulation it occurs any time a taxpayer acquires by investment any interest in the mineral in place and secures, by any form of legal relationship, income derived from the extraction of the mineral, to which he must 'look for a return of his capital. Indeed the conclusion of the majority must recognize the possibility of such a shift in economic interest under the Clintwood lease, because after the original 2-year term thereof the lessor has the absolute right to terminate the lease on short notice without cause and, according to the theory of the ¡majority, the economic interest in the coal in the Clintwood lease, which had theretofore rested hi the lessee, would revert to the lessor. Where, because of the uncertain terms of a mineral lease or contract, it is difficult to determine whether the lessee or contractor is simply mining the coal for the lessor for a fee or fixed price, or whether the lessor has actually surrendered his economic interest in the coal to the lessee, the presence of a short termination clause, considered along with the other terms of the agreement, would usually be entitled to considerable weight. But I do not believe it should be a conclusive factor in determining that the petitioners here, who obviously had an economic interest in the coal deposit and had to look to the extraction and sale of that coal for their profit, were not entitled to the depletion deduction solely because of the termination clause in the Bolling lease. Tietjens, J., Jdissenting: In my opinion the relationship of the petitioners to the coal which was mined differs so little from that dealt with in Lesta Barney, 47 T.C. 363, that I would hold they had no economic interest which would entitle them to depletion under any of the leases.   Which admittedly finds some support in some of the cases decided by this Court and the Court of Appeals for the Fourth Circuit, cited in the majority opinion.