Court Opinion

ID: 9445552
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:32:50.044018+00
Date Added: 2024-06-11T17:30:19.547631
License: Public Domain

KALODNER, Circuit Judge
(dissenting).
In Kohinoor Coal Co. v. Commissioner of Internal Revenue, cited by the majority, we unequivocally subscribed to these two propositions:
(1) Coal, culm and refuse banks are not “mines” within the meaning of Section 23 (m) of the Internal Revenue Code of 1939 [171 F.2d 885] “ * * * because they are not a natural mineral deposit”, or otherwise stated, “minerals in place.”
(2) Section 114(b) of the 1939 Code, which deals with the basis for depletion, has not-broadened the meaning of the term “mines” in Section 23 (m) to include the extraction and processing of coal from culm or refuse banks.
The majority adheres to the first proposition but holds to the contrary as to the second.
That that is so is readily apparent upon comparison with what we said in Kohinoor as to Section 114(b) and what the majority has said on that score.
In Kohinoor we said, 171 F.2d at page 885:
“The taxpayer’s contention here that Section 114(b) (4) (B) * * * has broadened the meaning of the term ‘mines’ in Section 23 (m) to include'the extraction and processing of coal from a culm bank was also raised in the Chicago Mines case.1 We are in accord with the ruling there that such a contention cannot be sustained.”
“Section 114(b) as amended deals with the basis for depletion, and does not come into play unless the taxpayer has an economic interest in a ‘mine’ or natural deposit within the meaning of Section 23 (m), which is defined in Treasury Regulations 111 as ‘minerals in place’. In view of the fact that the culm and refuse banks were not a ‘mine’ within the meaning of Section 23 (m) because they are not a natural mineral deposit, there is no occasion to ascertain the basis for depletion.”
The majority says:
“The extraction of coal from the banks was but a final step in the process of mining, as defined in section 114(b) (4) of the Internal Revenue Code of 1939, 26 U.S.C. § 114(b) (4) (A, B) which began when the material comprising the banks was extracted from the mines and deposited on the surface. The royalties received by the taxpayer for the coal extracted from the banks therefore constituted income from mining from which the depletion allowance was deductible.” (emphasis supplied)
It must immediately be noted that in the Kohinoor case, 171 F.2d at page 882, we specifically rejected the taxpayer’s contention that the provisions of Section 114(b) (4) extended to “ * * * the ordinary treatment processes normally applied by coal mine operators” and were not confined to “the extraction of ores or minerals from the ground.” (emphasis supplied)
The majority premised its view upon these conclusions of law:
(1) “It is immaterial here that ' the coal, culm and refuse banks are not themselves mines since the *153actual mines from which they were extracted are also owned by the taxpayer.”
(2) “The fact that an interval of time elapsed between the original mining from the earth of the material comprising the banks and the final extraction of the coal from the banks is immaterial.”
(3) “It may be fairly assumed without proof of a specific subjective intent that the operators of coal mines who deposited this material in banks upon their surface lands did so with the intention of giving it further treatment for the extraction of coal just as soon as and whenever it might prove profitable for them to do so.”
(4) “ * * * the extraction of coal by the taxpayer from these coal, culm and refuse banks was but a continuing step in the original mining operation * * * ” and that “ * * * this is so even though the taxpayer was not the owner of the mines when the material constituting the banks was deposited.”
The sum of the majority’s position is that culm banks are a “mine” under the 1939 Code if they were deposited from a mine presently owned by a taxpayer irrespective of the time lapse between the deposit and the extraction of the coal from the banks and irrespective of the fact that the taxpayer was not the owner of the original mine source at the time the culm banks came into being.
In the instant case the culm banks were all accumulated prior to 1932— principally between 1902 and 1919 — by the Philadelphia & Reading Coal & Iron Co. which had conducted mining operations under a lease entered into in 1874 (and subsequent renewals) with the then owners. The Philadelphia & Reading was an entity completely independent of control by the lessors. It operated the mines until 1938 when it instituted bankruptcy proceedings and its lease was for that reason terminated.
Between 1938 and 1941 the mining properties were not actively operated nor were the culm banks. In 1938 the heirs of those who had leased the mines to Philadelphia & Reading in 1874 conveyed their interests to the West Shenandoah Land Co. in exchange for its entire capital stock. In 1939 this company conveyed to the taxpayer part if its mining property (here involved) in exchange for its entire capital stock. In 1941 the taxpayer leased to the Kohinoor Coal Company certain of its culm banks (involved in the Kohinoor case) and in 1945 the parties entered into a new lease under which Kohinoor was given the right not only to work the culm banks involved in the prior lease but also the right to operate the underground coal workings and to conduct strip mining operations. On January 13, 1947, the taxpayer leased the unleased portion of its mining properties to the Mahanoy Valley Coal Company on terms similar to the 1945 lease to Kohinoor. On February 10, 1948 Mahanoy assigned its lease to the Gilberton Coal Company. During the taxable years involved (September 1, 1947-August 31, 1949) all of the taxpayer’s property was operated under the leases cited.
To say that the extraction of coal in 1948 and 1949 from culm banks accumulated between three and four decades earlier (1902 to 1919) by the then lessee, “was but a continuing step in the original mining operation” because “it may be fairly assumed without proof of a specific subjective intent that the operators of coal mines who deposited this material in banks upon their surface lands did so with the intention of giving it further treatment for the extraction of coal” is scarcely justifiable. It disregards these well-settled rules (1) in considering tax questions the courts will look to the substance — the hard realities —and not the shadow, of the situation; (2) tax deductions are permitted as a matter of legislative grace and “do not turn upon general equitable considerations” and the taxpayer must clearly establish that he or it comes within the *154deduction specifically authorized by Congress.2
In the instant case, under the 1874 and subsequent leases to the Philadelphia & Reading Coal & Iron Co. the then owners of the coal lands here involved had conferred upon their lessees, without reservation, the right to mine these lands and to operate such mines as they deemed proper. They did not reserve to themselves the right to extract coal from culm banks which might be accumulated in the course of the lessee’s mining operations and there can consequently be no assumption that they had “a specific subjective intent” to ultimately extract coal from such banks. Indeed the record discloses that the then lessee-operator had an “exclusive” right to work the culm banks which it accumulated.
The taxpayer here was clearly not a successor to the rights of the Philadelphia & Reading. Further, it and the West Shenandoah Land Co. from which it acquired title to the coal lands, are not only separate legal entities for tax purposes but both are also separate from the prior individual owners and the taxpayer cannot rely on any rights, assuming they existed, of prior owners in establishing its claim for depletion. The corporate veil will not be pierced in order to permit invocation of the legislative grace of a deduction in the absence of a clear provision permitting it to be done.3
Apart from the considerations mentioned it is difficult to reconcile the majority’s professed subscription to our holding in the Kohinoor case that culm banks are not “mines” within the meaning of either Section 23(m) or Section 114(b) (4) (B) of the 1939 Code and its ruling that such banks are “mines” within the latter section in the instant case, particularly in view of the fact that the identical culm banks are involved.
The majority seeks to distinguish the instant case from Kohinoor on the ground that the taxpayer there was merely the lessee of the culm banks and as such had no “economic interest in the coal in place” and it says we premised our disallowance of depletion on the absence of such “economic interest.”
I cannot subscribe to that construction of our ruling in the Kohinoor case. We there premised our disposition squarely on the ground that culm banks are not “mines”, viz., “minerals in place” within the meaning of Sections 23 (m) and 114 (b) (4) (B) of the 1939 Code. In doing so we merely observed that even in the case of a “mine” a taxpayer seeking depletion allowance must have an “economic interest” in it and noted parenthetically that Kohinoor under its then lease had no “economic interest” in the culm banks as to which it claimed depletion. The observation we made on the score of “economic interest” was patently, putting it colloquially, “driving another nail in the coffin” of the taxpayer’s contention in view of our holding there that a culm bank is not a “mine” under the 1939 Code.
On the score of our ruling in Kohinoor [171 F.2d 885] that culm banks are not “mines” under the 1939 Code because they are not a “natural mineral deposit” or “minerals in place,” the Supreme Court of the United States has time and again ruled that under the 1939 Code and its predecessors, oil, gas or minerals as to which depletion allowance is sought must be “in place” before the owner of an economic interest therein can receive such allowance. The Supreme Court spoke of “ore in place” in United States v. Biwabik Mining Co., 1918, 247 U.S. 116, 123, 38 S.Ct. 462, 464, 62 L.Ed. 1017; “oil in place” in United States v. Ludey, 1927, 274 U.S. 295, 300, 47 S.Ct. 608, 610, 71 L.Ed. 1054; Palmer v. Bender, 1933, 287 U.S. 551, *155557, 558, 53 S.Ct. 225, 77 L.Ed. 489; Kirby Petroleum Co. v. Commissioner, 1946, 326 U.S. 599, 603, 606, 66 S.Ct. 409, 90 L.Ed. 343; Burton Sutton Oil Co. v. Commissioner, 1946, 328 U.S. 25, 29, 32, 34, 66 S.Ct. 861, 90 L.Ed. 1062; Commissioner of Int. Rev. v. Southwest Exploration Co., 1956, 350 U.S. 308, 314, 316, 76 S.Ct. 308; “oil in the ground” in Thomas v. Perkins, 1937, 301 U.S. 655, 661, 57 S.Ct. 911, 913, 81 L.Ed. 1324; “wet gas in place” in Helvering v. Bankline Oil Co., 1938, 303 U.S. 362, 367, 368, 58 S.Ct. 616, 618, 82 L.Ed. 897; and “oil and gas in place” in Helvering v. O’Donnell, 1938, 303 U.S. 370, 371, 372, 58 S.Ct. 619, 620, 82 L.Ed. 903; and Helvering v. Elbe Oil Land Co., 1938, 303 U.S. 372, 375, 58 S.Ct. 621, 82 L.Ed. 904.
It will be observed that in the foregoing reference has repeatedly been made to the provision of the 1939 Code. That identification has been necessary because, although the majority did not advert to it, the Internal Revenue Code of 1954, for the years following its enactment, specfically provides in Section 611 (a), 26 U.S.C. § 611(a) that “ * * * the term ‘mines’ includes deposits of waste or residue, the extraction of ores or minerals from which is treated as mining under section 613(c).”4
The changes made in the Internal Revenue Code of 1954 with respect to culm banks are pertinent in the determination of the issue presented in the instant case.
The Committee on Ways and Means, H. Rep. No. 1337, 83rd Cong., 2d Sess., p. 59, 3 U.S.C. Cong, and Adm. News, 1954, pp. 4017, 4085, in its “General Statement” of its Report (accompanying H.R. 8300) relating to the Internal Revenue Code of 1954, specifically stated with respect to Section 613 “Mine Tail-ings” :
“Depletion allowances under present law are allowed with respect to mines and natural deposits. In mining operations frequently residue is accumulated which is currently waste material. Subsequently, technological innovations or changes in conditions of supply and demand may make it commercially feasible to recover the mineral content from that residue. Present law has been interpreted to deny depletion allowances with respect to minerals produced from such dumps or tailings.”
“Your committee’s bill would extend percentage depletion at the appropriate rates to mine owners for minerals recovered from the residue that had accumulated from their mine. It is in the public interest to encourage the production of minerals from these accumulations as well as from the mine itself.” (emphasis supplied)
The same House Report in its “Detailed Discussion of the Technical Provisions of the Bill’, H.Rep. No. 1337, supra, p. A183, 3 U.S.C. Cong, and Adm. News, supra, p. 4323, stated concerning Section 611, “Allowance of deduction for depletion”:
“This section is derived from section 23 (m) of the 1939 Code. Certain changes in wording and arrangement have been made for the purpose of simplification and consistency but, with one exception, there has been no substantive change in present law. The term ‘mines’ is defined to include deposits of waste or residue of mines, the extraction of ores or minerals from which is treated as mining under section 613(c). The effect of this amendment is to extend allowances for depletion to the extraction of ores or minerals from waste or residue of prior mining.
“ * * * Thus, where a mine owner is engaged in the mining and sale of ores or minerals from origi*156nal mine workings along with ores or minerals produced by him from vjaste thereon, the gross income from both shall be aggregated in determining the gross income from the property * * *. ” (emphasis supplied)
Again, with respect to Section 613, “Percentage Depletion”, at p. 185, 3 U.S.C.Cong. and Adm. News, supra, p. 4325, it was stated:
“ * * * The term ‘extraction of the ores or minerals from the ground’ in present law has been amended to provide that such term includes the extraction by mine owners or operators of ores or minerals from the waste or residue of their prior mining. Thus, a depletion allowance may be permitted when based on the extraction of minerals or ores from waste or residue of mining, such as a tailings dump or a culm bank, if performed by the mine owner or operator * * *" (emphasis supplied).
The Senate Finance Committee, S. Rep. 1622, 83rd Cong. 2d Sess., 3 U.S.C. Cong, and Adm. News, 1954, pp. 4621, 4712, in its “General Explanation” of its Report, had this to say with respect to the section in its. Bill dealing with “Mine Tailings”, Section 613:
“Depletion allowances under present law are allowed with respect to mines and natural deposits. The House and your committee’s bill extends percentage depletion at the appropriate rates to mine owners for minerals recovered from the residue that had accumulated from their mine. The provision does not apply in the case of a purchaser of such waste or residue or to a purchaser of rights thereto.” (emphasis supplied)
The same Senate Report in its “Detailed Discussion of the Bill” at p. 329, 3 U.S.C. Cong, and Adm. News, supra, p. 4970, stated with respect to Section 611 “Allowance of deduction for depletion” :
“This section corresponds to section 611 of the bill as passed by the House, and is derived from section 23 (m) of the 1939 Code. Section 611 of the House bill made certain clerical changes in existing law, but made no substantive change other than to provide that the term ‘mines’ includes deposits of waste or residue of mines, the extraction of ores or minerals from which is treated as mining under section 613(c). The effect of this provision of the House bill is to extend allowances for depletion to the extraction of ores or minerals from waste or residue of prior mining.” (emphasis supplied)
Again with respect to Section 613, “Percentage depletion”, at page 333, S. Rep. 1622, supra, 3 U.S.C. Cong, and Adm. News, supra, p. 4973, it was stated:
“Section 613(c) (3) of the House bill extended depletion to deposits of waste or residue of prior mining by adding a provision that the term ‘extraction of the ores or minerals from the ground’ includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining.” (emphasis supplied)
It is true, as pointed out by counsel for the taxpayer, that S. Rep. 1622, supra, p. 333, 3 U.S.C. Cong, and Adm. News, 1954, 4621, 4974, states that “No inference can be drawn from the reclassification of certain minerals and other actions as to the meaning of present law.” Nevertheless, in view of the fact that the issues are specifically admitted and discussed by the House and Senate Reports, it is permissible and proper to draw such inferences. It is clear from the unambiguous statements in the legislative committee reports that the 1954 Code changed the prior law by incorporating in the definition of “mines” culm banks such as are involved in the instant case and specifically “extended” depletion allowance to culm banks. The Government has correctly summarized the taxpayer’s position *157with its statement that the taxpayer seeks to have this Court adopt the 1954 provisions in interpreting Section 23 (m) and Section 114(b) (4) (B) but the 1954 provisions are not retroactive.
One final comment:
While the 1954 Code makes academic, with respect to the years following its enactment, the issue presented in this appeal, its resolution is of critical importance in the application of the prior revenue laws because of the tremendous scope of culm bank operations prior to 1954.
For the reasons stated I would reverse the judgment of the District Court.

. Chicago Mines Co. v; Commissioner and London Extension Mining Co. v. Commissioner (companion cases), 10 Cir., 1947, 164 F.2d 785, certiorari denied 333 U.S. 881, 68 S.Ct. 913.

. Montana Power Company v. United States of America, 3 Cir., 1956, 232 F.2d 541, certiorari denied 1956, 352 U.S. 843, 77 S.Ct. 51, 1 L.Ed.2d 59.

. New Colonial Ice Co. v. Helvering, 1934, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348; Deputy v. Dupont, 1940, 308 U.S. 488, 493, 60 S.Ct. 363, 84 L.Ed. 416; Montana Power Company v. United States, supra, note 2.

. Section 613(c) (3), 26 U.S.C. § 1613(c) (3) provides in part as follows:
“The term ‘extraction of the ores or minerals from the ground’ includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining.”