Court Opinion

ID: 4589778
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:02:12.817135+00
Date Added: 2024-06-11T07:50:21.197244
License: Public Domain

MCALESTER-EDWARDS COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McAlester-Edwards Coal Co. v. CommissionerDocket No. 4490.United States Board of Tax Appeals10 B.T.A. 1368; 1928 BTA LEXIS 3895; March 14, 1928, Promulgated 1928 BTA LEXIS 3895">*3895  1.  The value of coal mine leasehold and plant, equipment and development on same as of March 1, 1913, and also the amount of coal reserves on said leasehold as of that date, determined.  2.  Method of computing depletion and depreciation deductions and also deductions for invested capital purposes stated.  3.  The income derived by a non-Indian lessee from leaseholds on the unallotted tribal lands of the Choctaw and Chickasaw tribes of Indians is not exempt from Federal taxation.  Heiner v. Colonial Trust Co.,275 U.S. 232">275 U.S. 232. Charles H. Garnett, Esq., for the petitioner.  Benjamin H. Saunders, Esq., for the respondent.  GREEN10 B.T.A. 1368">*1369  In this proceeding the petitioner seeks a redetermination of its income and excess-profits taxes for the years ended June 30, 1920, 1921, and 1922, for which years the respondent has determined deficiencies as follows: For the year 1920, $4,149.10; for the year 1921, $4,319.44; and for the year 1922, $3,934.43.  The petitioner alleges that the respondent erred: 1.  In fixing fair market value of the petitioner's coal mining leasehold as of March 1, 1913, at $103,582 when its fair market value1928 BTA LEXIS 3895">*3896  was $250,000.  2.  In fixing the fair market value of the plant, equipment, buildings and developments on petitioner's coal mining leasehold as of March 1, 1913, at $94,052.97, when the fair market value was $120,022.53.  3.  In fixing the coal reserves on said leasehold as of March 1, 1913, at 1,280,000 tons of recoverable coal when the true and correct amount was $1,713,107 tons.  4.  In the disallowance of depletion deduction based on the excess of the fair market value of the petitioner's mining leasehold on March 1, 1913, over cost.  5.  By the reduction of invested capital for each of the years in question by depletion deductions from cost based on a unit rate of $.032 when the correct rate should have been $.024995.  6.  In disallowing as invested capital that proportion of depletion representing the realization of appreciation at March 1, 1913, where the same was undistributed and also used and employed in the taxpayer's business.  7.  In taxing the income of the petitioner derived from leases made with the approval of the Secretary of the Interior on unallotted allotted tribal lands of the Choctaw and Chickasaw tribes of Indians.  FINDINGS OF FACT.  The McAlester-Edwards1928 BTA LEXIS 3895">*3897  Coal Co. is an Oklahoma corporation with its principal place of business in Pittsburg, where it is engaged in the business of prospecting for and producing coal.  In 1906 it acquired two mining leases covering 1,920 acres situated on the McAlester vein of coal in Pittsburg County, Okla., on unallotted land of the Choctaw and Chickasaw Indian tribes.  These leases 10 B.T.A. 1368">*1370  were made on June 3, 1899, by the mining trustees of the Choctaw and Chickasaw Indians, under and in pursuance of the provisions of the Act of Congress approved July 28, 1898, 30 Stat. 495, and under the rules and regulations prescribed by the Secretary of the Interior, to Daniel Edwards and Thomas D. Edwards, trading as D. Edwards & Son, and ran for a period of thirty years from July 3, 1899.  Said leases were duly approved by the Secretary of the Interior on August 22, 1899.  The petitioner acquired the leases in question from D. Edwards & Son.  The consideration paid was $90,000, of which $52,000 was attributed to leasehold and $38,000 to development and improvements.  In 1903 the Government discontinued the practice of making further leases on the McAlester seam of coal, but under the provisions of an Act1928 BTA LEXIS 3895">*3898  passed on March 4, 1913, the petitioner acquired an additional 640 acres adjoining the original leases under the same terms and expiring at the same date.  The royalty stated in the original leases was 10 cents per ton, but this was subsequently reduced by the Secretary of the Interior to 8 cents per ton.  The petitioner's production for the years 1907 to 1925 was as follows: YearTons190734,464190852,685190982,553191063,152191143,666191273,377191377,131191467,733191594,826191661,227191718,183191874,648191995,9921920123,5531921111,7701922158,4981923148,7541924119,3071925107,100The possibility of labor troubles, car shortages and the effect of the opening of oil pools, and the adoption of the use of fuel oil by the railroads were all known factors in 1913.  The value of the leasehold as of March 1, 1913, was $200,000.  The value of the plant, equipment, buildings and development thereon as of that date was $120,000.  The respondent in determining the deficiencies of $4,149.10 for the year 1920, $4,319.44 for the year 1921, and $3,934.43 for the year 1922, fixed the March 1, 1913, value1928 BTA LEXIS 3895">*3899  of the leasehold at $103,582, and the value of plant, equipment, buildings and development at $94,057.92, and the amount of recoverable coal on that date at 1,280,000 tons.  10 B.T.A. 1368">*1371  OPINION.  GREEN: In this proceeding the petitioner has alleged that the respondent committed a number of errors in the computation of its income and excess-profits taxes for the years ended June 30, 1920, 1921, and 1922.  We will discuss these alleged errors in the order in which they have been previously stated.  The petitioner contends that the fair market value of the mining leasehold as of March 1, 1913, was $250,000 while the respondent has determined the value to be $103,582, and that the value of the plant, equipment, buildings and development on this leasehold as of March 1, 1913, was $120,022.53 while the respondent has determined a value of $94,057.92.  F. B. Drew, treasurer and general manager of the petitioner, in his testimony as to the value of the leasehold and the plant, development and equipment thereon, placed a value on the leasehold of from $200,000 to $260,000.  The value of $260,000 was based on the theory that on March 1, 1913, the leasehold was worth at least five times1928 BTA LEXIS 3895">*3900  its cost in 1906.  There were no sales of similar properties around March 1, 1913, other than the sale of two-thirds of the stock of the Melby-Dow Coal & Mining Co. which occurred in 1912.  The Melby-Dow property, which was 16 miles distant from the mines of the petitioner, was held under a similar lease, contained the same number of acres, had the same number of openings, was on the McAlester seam of coal, served the same territory and had a similar production as the mines of the petitioner.  The Melby-Dow Coal & Mining Co. had exhausted more of its crop coal and the McAlester seam of coal at their property was from 4 to 8 inches less in thickness than at the mines of the petitioner.  The two-thirds interest in this corporation was sold for $200,000.  It was adduced at the trial that the Melby-Dow Coal & Mining Co. claimed $249,000 as the March 1, 1913, value of their plant, equipment, buildings and development.  Evidence was also introduced showing the monopolistic character of the leases on the McAlester seam of coal on account of the fact that after 1912 the Government discontinued the making of coal leases on this seam.  Drew also testified that the plant, equipment, buildings1928 BTA LEXIS 3895">*3901  and development were carried on the books of the petitioner at $150,000, that this sum should be depreciated by $30,000 and that in his opinion $120,000 represented the value of these items.  The respondent offered no evidence to refute the testimony introduced by the petitioner that the value of the leasehold was $200,000 and that the value of the plant, equipment, buildings and development on the same was $120,000 as of March 1, 1913, and we have found these to be the values.  10 B.T.A. 1368">*1372  As to the amount of coal reserves in the leasehold as of March 1, 1913, it was admitted that the available coal could not be exhausted during the term of the lease.  The principal factor to be considered is the amount of coal that could reasonably be expected to be mined and sold during the remaining life of the lease.  The respondent in making his estimate used $80,000 tons per year as the estimated production for remainder of the lease in arriving at the total of $1,280,000 tons.  In 1913, using the experience of the prior six years, an average of 70,000 tons per year had been produced.  The petitioner at that time had two openings and contemplated a third opening which was later completed. 1928 BTA LEXIS 3895">*3902  It also made a fourth opening, but this opening was in the same territory as opening No. 2 and did not increase the petitioner's production.  In 1913 the future sales of the petitioner were difficult to estimate on account of the fact that oil pools had been discovered which interfered with the possible sales of coal to railroads and other users in the territory.  Labor troubles were known to be a troublesome factor in the matter of production.  The petitioner's production record for the years 1907 to 1925, inclusive, which shows an average production of approximately 84,000 tons, is not, under the circumstances, determinative of the amount of the coal reserves as of March 1, 1913, but it is proper to use such figures in checking the respondent's estimate.  In the light of all the facts known on March 1, 1913, we are of the opinion that the respondent's determination of the amount of coal reserves should not be disturbed.  As to the fourth assignment of error, we have found that the March 1, 1913, value of the depletable and depreciable properties consisting of leasehold, development and equipment, was $320,000.  This amount divided by the estimated tons of coal to be mined during1928 BTA LEXIS 3895">*3903  the term of the lease, which we have found to be $1,280,000 tons, gives the combined unit rate of depletion and depreciation which, multiplied by the number of tons of coal mined during any given year, will equal the combined amount of depletion and depreciation deductible from gross income during that year.  Assignments of errors five and six deal with invested capital.  We are not advised in the record as to the action taken by the respondent.  In the case of assets acquired prior to March 1, 1913, depletion for invested capital purposes and depletion for the purpose of computing the annual deduction from income may be two totally different things and should never be confused.  The only amount of depletion or depreciation which should be deducted from invested capital is the amount of depletion and depreciation computed on the basis of cost.  To the extent that the respondent has reduced invested capital by any amount in excess of such depletion and depreciation based on cost, he is in error and the invested capital determined by him should be increased by the amount of such realized appreciation.  10 B.T.A. 1368">*1373  The seventh assignment of error deals with the income of lessees1928 BTA LEXIS 3895">*3904  of Indian lands.  The Supreme Court in the case of , decided November 21, 1927, holds that the income derived from a lease of restricted Indian lands is not exempt from Federal taxation.  The petitioner's income was derived from the leases of unallotted tribal lands of the Choctaw and Chickasaw Indians, made with the approval of the Secretary of the Interior, and accordingly, the respondent's determination that such income is taxable is correct.  See . Judgment will be entered on 15 days' notice, under Rule 50.