Court Opinion

ID: 6916574
Source: CourtListenerOpinion
Date Created: 2022-07-23 22:43:07.761598+00
Date Added: 2024-06-11T16:06:40.392783
License: Public Domain

KALODNER, Circuit Judge
(dissenting).
*602I would grant the petition for rehearing. Further, on rehearing I would reverse the judgment of the district court on the principal issue involved — the existence of an economic interest.
The Supreme Court has charted the course and the law in cases of this type. Only recently it stated, firmly and concisely, that a taxpayer is entitled to the depletion deduction “where he has: (1) ‘acquired, by investment, any interest in the oil in place,’ and (2) secured by legal relationship ‘income derived from the extraction of the oil, to which he must look for a return of his capital.’ ” Commissioner of Internal Revenue v. Southwest Exploration Co., 1956, 350 U.S. 308, 314, 76 S.Ct. 395, 398, 100 L.Ed. 347.
“These two factors, usually considered together”, said the Supreme Court in the Southwest Exploration case, “constitute the requirement of ‘an economic interest.’ ”
Nothing was said by the Supreme Court in that case on the score as to the impact of a right of termination of a contract creating an economic interest on the existence of that interest in the first place. Nor has the Supreme Court said so in any other case. We did not consider nor did we pass upon this question in Commissioner of Internal Revenue v. Mammoth Coal Co., 3 Cir., 1955, 229 F.2d 535. Nor has any other appellate court done so except the Fourth Circuit. That Circuit, however, has explicitly ruled that a right of termination does not destroy an economic interest which existed prior to its exercise. It did so in two cases: Weirton Ice and Coal Supply Co. v. Commissioner, 1956, 231 F.2d 531, 533 and Commissioner of Internal Revenue v. Hamill Coal Corp., 1956, 239 F.2d 347.
In Weirton it was said (231 F.2d at page 535):
“It is of no moment that the owner of the mineral, as in other cases in which the right of an extractor to a deduction for depletion has been upheld, had the option to terminate the arrangement at any time, for as the event proved, Weirton actually mined the coal during all the taxable years.”
In Hamill, the contract (entered into in 1944) was to continue for one year and from year to year thereafter with the right of either party to terminate it at any time upon 90 days’ written notice. The contract was terminated in 1947 by mutual agreement “after Daniel [the stripper] had removed substantially all the coal with an overburden of less than 40 feet.” (239 F.2d at page 349.)
In Weirton the decision does not disclose when mining operation ceased or whether the stripper ever mined to exhaustion. In Hamill, however, the record discloses that subsequent to termination the owner of the mine actually mined some 90,000 tons of coal.
In the instant case it is undisputed that the stripper (taxpayers) mined to exhaustion and that the contracts were terminated by mutual agreement after such exhaustion so that the factual situation here is much stronger than in either Weirton or Hamill.
I agree with the view of the Fourth Circuit that the right of termination does not affect a stripper’s right to depletion where the requisite economic interest as defined by the Supreme Court exists. The Commissioner and the courts must deal with a situation as it exists during the taxable year involved and not as it might exist in some future year because of the possible occurrence of an event through the exercise of a contractual right.
It is not necessary, however, that I go as far along the course stated in the decision of the instant case. The record here discloses that the termination clause was included in the contract as a precaution on the part of the owner to protect itself from possible difficulties with an incompetent stripper.1 It may be noted *603parenthetically that in the opinion sought to be reconsidered it was erroneously stated “We are not told the reason for including this cancellation clause.”
Assuredly, prior to the exercise of the termination clause, taxpayers here “had an economic interest in the oil [coal] in place through its [their] control over extraction.” Burton-Sutton Oil Co., Inc., v. Commissioner, 1946, 328 U.S. 25, 34, 66 S.Ct. 861, 866, 90 L.Ed. 1062. That control, moreover, actually existed, as already said, until the property was mined to exhaustion. Further, as stated in Burton-Sutton Oil Co. “Depletion depends only upon production”.
It is the possibility of profit from the use of rights over production dependent upon the extraction of the mineral which marks an economic interest. No money need be invested in the mineral deposit. Commissioner of Internal Revenue v. Southwest Exploration Co., 350 U.S. at page 312, 76 S.Ct. at page 397.
There is no room for doubt that the taxpayers had the requisite control over production, for under the contracts, the Coal Company gave to taxpayers the exclusive right to mine all of the merchantable coal in place in the leased area. That such right might have been brought to an end does not affect the present fact that the economic interest existed.
There is also no room for doubt that the taxpayers depended solely upon production for their return, since they received only the agreed price per ton for coal produced and delivered. Indeed, they bore all risks of mining, including, but not limited to, the finding and production of commercial quality coal in such quantities necessary to make operation profitable.
Until now, every appellate decision in this type of case, including our own decision in Commissioner of Internal Revenue v. Mammoth Coal Co., supra, has held that there is no requirement that the stripper must assume the risks of the ultimate market. To the extent that we now hold otherwise, we are in conflict with our decision in that case and with the decisions of the Fourth Circuit. We are also in conflict with the latest pronouncement of the Supreme Court, Commissioner of Internal Revenue v. Southwest Exploration Co., 350 U.S. at page 314, 76 S.Ct. at page 398, that the taxpayer must look solely to the extraction of the mineral for his return. That is what the taxpayers here had to do.
Although we said, in Commissioner of Internal Revenue v. Mammoth Coal Co., 229 F.2d at page 537, that “The facts in each case determine the result”, I do not regard such declaration as an admission that the criteria to be applied are too vague to do so on other than the basis of “the reasonable man”. To the facts must be applied statute and the specific rules pronounced by the Supreme Court in the interpretation of it. That is the teaching of Commissioner of Internal Revenue v. Southwest Exploration Co., supra.
I conclude, therefore, that the taxpayers during the taxable years involved had the requisite economic interest in the coal in place. This, to me, is the result required by the decisions of the Supreme Court, the Fourth Circuit, and this Court; and our present decision is inconsistent therewith.
Accordingly, I would grant rehearing and reverse the judgments of the district court.

. Russell Huss testified (p. 60 N.T.) tliat the termination clause “was put in there in a form contract so as if they got hold of a contractor who was not reputable, who wouldn’t live up to the contract, they could put him off the property without court action.”