Court Opinion

ID: 4474786
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:08.749461+00
Date Added: 2024-06-11T14:53:52.680414
License: Public Domain

Disney, J., dissenting: The majority conclude that the petitioner had net abnormal income from the sale of coal from the Maxton Coal Mine because it concluded that the income from the coal sold from that mine was a “separate class of income” under section 721 (a) (2) (C) of the Internal Revenue Code. I can not agree. I note at once that the petitioner contends for an abnormality to the extent of the excess above 125 per cent of average gross income of the same class. Therefore, it is beyond question that the petitioner does not claim that the abnormal income here involved means income abnormal in nature or type — for if it had so claimed, the petitioner would not limit its claim to the excess above 125 per cent. I, therefore, also note that section 721 (a) (1), in effect, defines such income abnormal in nature or type as such that “it is abnormal for the taxpayer to derive income of swh class.” In short, the petitioner in limiting its claim to abnormality of income, to excess over 125 per cent, appears to admit that the income from the Maxton Mine was of the same class as it had previously produced — since otherwise petitioner would have claimed complete abnormality. We, therefore, see the petitioner in the position of tacitly agreeing that the income from the Maxton Mine in 1943 is not different in class from what it had earlier produced, but nevertheless see the petitioner contending that the income from the Maxton Mine coal constituted a class by itself because the petitioner wishes to calculate the 125 per cent, not upon the average gross income of all of its coal for the four previous years (which, we have just seen, it impliedly admits is of the same class as the Maxton coal) but wishes to calculate the 125 per cent upon the Maxton Mine coal only, because in that way it can produce a small figure to substract from the gross income from the Maxton Mine in 1943, and thus arrive at a higher “net abnormal income.” This is our pivotal question: “Is the 125 per cent to be calculated solely upon Maxton Mine coal for the four previous years, or upon all of the coal produced by the petitioner, a coal mining company ? The petitioner contends, and the majority agree, that the claim should be allowed merely because of the text of section 721 (a) (2) (C), which, in substance, says that “Income resulting from exploration, discovery, prospecting, research, or development of tangible property * * * over a period of more than 12 months” is a “separate class of income.” Aside from the illogic, above seen, in petitioner’s failing to claim complete abnormality in 1943 if the gross income for that year was not of the same class as its previous and normal income, it seems to me that the majority conclusion is without sufficient basis, for two reasons: (1) The expression “Income resulting .from exploration, discovery, prospecting, research, or development of tangible property,” in my view, does not, as the majority seems to conclude, mean that income resulting from exploration, etc., of a certain piece of property, comprises a separate class. Such a holding appears to me to place all the emphasis upon “property” and, in effect, says that each property produces a separate class of income. I do not think it was intended by Congress that a coal mining company, developing a coal mine, should be considered to be producing a separate class of income just because it is a new mine. Of course, if it was a gold mine, a new proposition with that company, it would come within the idea of abnormality in type, but if the company is merely continuing to develop coal mines, the mere fact that a new mine is a new “property” does not, as I see it, control. Yet the majority so allows, apparently merely because, under the text, there is income resulting from exploration, etc.; but more broadly read the language means that all income resulting from exploration, etc., of tangible property (not “a tangible property”) constitutes “a separate class of income”'; and, in my view, that is just what this coal mining company had been doing for a number of years — ^exploring, discovering, prospecting, and developing tangible property. In my opinion, therefore, it was doing nothing new in class in 1943 merely because it had a new mine or single “property.” It was merely continuing to have, as it had had for several years, income resulting-from exploration, development, etc., of coal mines. I think the petitioner and the majority opinion view the language too narrowly, that the income from such coal mining work in 1943 was in no separate class from what it had been in previous years, and that by failing to claim complete abnormality in 1943 petitioner has recognized, the identity in class between the income of 1943 and previous years. Therefore, I would apply the 125 per cent not merely to the average gross income of the Maxton Mine, but to all of petitioner’s coal mines for the four previous years. (2) The impropriety of doing otherwise and applying the 125 per cent to Maxton Mine gross income only is demonstrated, I think, by the fact that, despite the. fact that the Maxton Mine was acquired in June 1940 and indeed no coal was taken from it until 1941, and despite the fact that petitioner’s own computation is upon the basis that gross profit from the Maxton Mine was “none” for 1939,1940, and 1941, nevertheless these three years of no gross profit are used in obtaining the 4-year average. In short, gross profit of $15,759.71 for 1942 is averaged with “none” for 1939-40-41 to arrive at a 4-year average of $3,939.93 — from which at 125 per cent petitioner gets $4,924.91, which alone it subtracts from the $155,780.81 gross profit for 1943 and arrives at “abnormal income” for that year of $150,855.90. It is quickly obvious that there is no logic in arriving at gross profit for the Maxton Mine by using 2 years when it did not produce at all, and one year, 1939, before it had even been acquired. Such an average is certainly not any real average for the Maxton Mine. Such procedure, moreover, seems altogether inconsistent with the object of the statute as brought out in. section 721 (c), which provides a way of “computation of tax for current taxable year” and, in effect, provides that it shall not exceed the tax for the taxable year computed without the inclusion in gross income of the portion of net abnormal income “which is attributable to any other taxable year” and the aggregate of the increase in the tax for the taxable year and for each previous taxable year which would have resulted if for such previous year “to which any portion of such net abnormal income is attributable” an equal amount had then been included. In effect, the result of the statute is as if the abnormality found in the taxable year is spread over the previous years to which it is attributable. There can be no doubt of this, for the language “attributable to any previous taxable year or years” is found in section 721 as the excess profits law was enacted in the Second Revenue Act of 1940, and the Committee Report of the Ways and Means Committee (77th Cong., 1st sess., H-. Rept. 146) — with reference to the Revenue Act of 1941 — states as follows: 4. Existing law provides for adjustments with respect to six specific classes of abnormal income received during the taxable years subject to the excess-profits tax. These specific items were allowed to be spread over the years to which they are actually attributable. * * * (pp. 2-3) * * * If abnormal income falling within any one of these six described classes is received by the taxpayer it is provided that such income should be allocated to the taxable years to which it is attributable * * *. (pp. 9-10) Again (pp. 9-10), we find: * * * The mere fact that an item includible in the gross income of the taxpayer is abnormal, or is in excess of 125 percent of the average amount of the gross income of the same class for the test period, does not result in the exclusion of such item from excess-profits net income. It is necessary that the item be found attributable to other taxable years. * * * This is consistent with what we held in Southwestern Oil & Gas Co., 6 T. C. 1124, 1133, where, in accordance with the regulations, we said that the abnormal amount (after certain adjustments not here involved) “should be ‘attributed to the taxable years during which expenditures were made for the particular exploration, discovery, prospecting, research, or development which resulted in such item being realized * * as contemplated by the regulations quoted above.” I do not see how on the theory of a separate class of income for the Maxton Mine any abnormality of income, limited to the Maxton Mine as the majority treats it, can be attributable to years before that mine was acquired — 1939 and until June 1940 — and such treatment seems to me to demonstrate the falsity of the petitioner’s theory that there was “a separate class of income” over such 4-year period. Moreover, during 1939 and 1940 there was no income at all from the Maxton Mine and during 1941 gross profit was “none”; and petitioner’s only gross income and therefore the only gross income which could possibly have been “of the same class” as that for 1943, during 1939-1941, was the income from other mines — and, in my view as above expressed, it was truly of the same class as that produced in 1943. A coal mining company habitually opening and developing coal mines incurs no abnormality, in my opinion, merely by opening another. This view was taken in the Congressional discussion in the Senate during the passage of section 721. Senator Adams, quoting the general provision as follows: “and, in the light of the taxpayer’s business, it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class, the item includible in the gross income of the taxable year is grossly disproportionate to the gross income of the same class in the 4 previous taxable years,” added “If we are dealing with mines, I suppose that means the average of a group of mines, or mines generally, rather than a particular mine,” to which Senator Harrison answered “That is correct.” A little later Senator Harrison quoted from a report from Mr. Stam, Chief of Staff, as follows: “An oil company might derive income from an oil well in 1940, which is much greater than it received in the 4 preceding taxable years for oil wells * * (Italics mine.) See Seidman’s Legislative History of Excess Profits Tax, pp. 128-129. Is it not clear that the Senators considered that abnormality of income from a mine or oil well was to be found by comparison not with the experience from that particular mine or well, but from the previous experience of the taxpayer with other mines or wells 1 Such discussion on the floor of Congress is, of course, not conclusive, but it is obviously enlightening. The view of the majority means that the operator of a new mine after 12 months of development can compute net abnormal income by deducting from the income therefrom 125 per cent of the amount of the gross income therefrom prior to the 12-month period, divided by 4, though it had gross profit from such mine in only one previous year — provided only that it was in existence during the 4 years, even though it had not owned the particular mine more than a small part of the 4 years. For instance, if it acquired a mine prior to June 30 of a year and during the rest of that year explored, prospected, and discovered mineral thereon, but with very small gross profit, and it then continued the exploration, prospecting, research, or development for another 12 months, with great gross income, it could, under the majority view, spread the very small gross income from the first 6 months over a period of 4 years by dividing it by 4, deduct 125 per cent of the small figure obtained, from the gross income for the 12 months, and have the remainder, practically the entire gross income, for deduction as abnormal — all despite the fact that this was not “in the light of the taxpayer’s business” — to use the language of the committee reports — for any 4-year period, and despite the clear intent of the statute to spread taxability of net abnormal income only so far as it is attributable to former years. I can not subscribe to such a result, and I think it emphasizes the error in the majority view. I respectfully dissent.