Court Opinion

ID: 4592206
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:07:25.782771+00
Date Added: 2024-06-11T07:50:49.517105
License: Public Domain

MOBERLY FUEL & TRANSFER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Moberly Fuel & Transfer Co. v. CommissionerDocket No. 27862.United States Board of Tax Appeals17 B.T.A. 1242; 1929 BTA LEXIS 2153; November 6, 1929, Promulgated 1929 BTA LEXIS 2153">*2153  1.  Deductions claimed by a coal-mining corporation from its gross income for 1922, on account of losses sustained in 1921 through the abandonment of certain properties, allowed in part, to the extent of the net loss sustained in said prior year.  2.  Allowable deductions for development and improvement costs determined.  Charles P. Woodbury, Esq., for the petitioner.  L. A. Luce, Esq., for the respondent.  LANSDON 17 B.T.A. 1242">*1242  This appeal seeks the redetermination of a deficiency asserted against petitioner of income and profits tax for 1922, in the sum of $664.07.  The alleged errors are, (1) failure of the Commissioner to allow deductions from the gross income of petitioner for the taxable year of a claimed net business loss sustained in prior year; (2) error of Commissioner in computing allowable deductions for depreciation; and (3) failure of Commissioner to allow claimed deductions for depletion to petitioner's coal reserve.  FINDINGS OF FACT.  The petitioner is a Missouri corporation engaged in the mining of coal with principal offices at Moberly, Mo.  In October, 1917, it purchased in fee, 80 acres of coal lands from one Val Kapler, upon1929 BTA LEXIS 2153">*2154  which it sunk what is referred to in the record as its No. "2" shaft, at a cost of $4,129.93.  It operated this shaft from and after its opening, which was some time in 1918, until about March 15, 1921, at which time it abandoned it on account of the exhaustion of its recoverable coal.  Early in 1918 the petitioner acquired by leases the coal rights of other tracts of lands which it intended to operate from its shaft No. "2," and in connection with the Val Kapler tract.  These leases covered land which adjoined this tract on the south and west, respectively, and were acquired at a cost of $3,720 to the corporation.  Prior to its abandonment of shaft No. "2" the petitioner attempted to penetrate the coal under these leases through runs driven from this shaft, but met with rock interference on the south and faulty roof to the west, which made such operations impossible.  Following this abandonment, about March 15, 1921, the corporation began a series of drill tests to determine the mineral content of their unworked properties.  A thorough prospecting of these leases disclosed the absence of coal 17 B.T.A. 1242">*1243  in quantities that could be worked without loss, and the corporation abandoned1929 BTA LEXIS 2153">*2155  them during 1921, and transferred its operations to another field some mile and a half to the south.  This last mentioned location covered a lease of 100 acres of coal lands which the corporation had acquired without cost, and which it operated upon a royalty basis, paying 12 1/2 cents for each ton of coal mined.  Upon this lease the corporation spent in one form or other, by way of improvement and development, the sum of $41,189.51, which included the cost of its No. "3" shaft.  From this shaft it lifted, during the taxable year, 18,340.50 tons of coal, and paid therefor in royalties $267.62.  In making its income and profits-tax return for 1922, the petitioner claimed, as deductible from its gross income, the sum of $3,718.42, representing an alleged net operating loss sustained in 1921, to which the abandonment of its leases and shaft, aforesaid, were contributory factors.  It also claimed the further deduction of $1,889.07 on account of depletion of its mineral reserve during 1922, and certain other amounts for depreciation of its plant and equipment.  The Commissioner disallowed the petitioner's claim of allowances for the net operating loss carried over from 1921, and for1929 BTA LEXIS 2153">*2156  depletion to its reserve, but allowed the sum of $267.62 paid as royalties in lieu of depletion claims.  He also disallowed, in part, petitioner's claims due to depreciation of its plant and equipment, but the alleged error in such connection was abandoned by the petitioner at the hearing.  OPINION.  LANSDON: The first alleged error involves the rejection of petitioner's claim of deduction for losses sustained in the prior year.  Two items figure in this loss, viz, (1) $4,129.23, representing the cost of shaft No. "2," and (2) $3,720 as the cost of the leases abandoned.  In respect to the first item the record shows that this expenditure was made in 1918 and that the shaft was operated by the petitioner until 1921, at which time it was abandoned on account of the exhaustion of the coal.  Obviously, some loss resulted from the abandonment of this shaft in 1921, but the record fails to establish its depreciated cost on said date and we are unable to determine what that loss was.  It, therefore, follows that this first item can not be considered by us in this computation.  The second item refers to the cost of the leases abandoned in 1921.  The record shows that the value, or rather1929 BTA LEXIS 2153">*2157  lack of value, of these leases was not determined until the completion of the drill tests in 1921.  These tests showed an absence of coal in the ground covered 17 B.T.A. 1242">*1244  by these leases in sufficient quantities to justify commercial operations.  The investment in these leases, plus the cost of these tests, therefore, resulted in a total loss to the corporation, which it was entitled to take in 1921.  We, therefore, hold that so much of this item ($3,720) as may be included in any net operating loss sustained by the petitioner in 1921 may be deducted from its net income for 1922.  The remaining assignment of error relates to respondent's rejection of petitioner's claim for deduction on account of depletion of its reserve during 1922.  In support of this claim the petitioner urges that it spent the sum of $41,189.51 in the development of its shaft No. "3," out of which it lifted 18,340 tons of coal during the taxable year.  Estimating its entire recoverable reserve to be 400,000 tons, and setting up this alleged expenditure as the basic value, it determines a depletion cost unit of .103 cents per ton.  With this unit of value it determined a depletion of its reserve, through the1929 BTA LEXIS 2153">*2158  18,340 tons mined, in dollars and cents, of $1,887.07.  The respondent denies petitioner's right to claim depletion upon any cost price theory, and alleges that it acquired no property interest to the coal in place which could be subject to depletion in view of the fact that the lease was procured without cost, and argues that the payment of royalties under the lease amounted to a purchase of each ton of coal, as and when mined.  He further denies that the expenditure claimed by petitioner as development cost was made solely in connection with its shaft No. "3," or under circumstances that would entitle it to be included in the basic value of the coal in place.  No value was claimed by the petitioner for the lease as such, in this case, but the sum of $41,189.51 was spent in development.  Regardless as to whether the petitioner correctly claimed this deduction as for exhaustion of its lease, or as depletion of its mineral reserve, it is clear that it is an allowable deduction under the conditions shown and the claims of the petitioner in respect thereto must be sustained.  Reviewed by the Board.  Decision will be entered under Rule 50.