Before MARIS, GOODRICH and KALODNER, Circuit Judges.
This appeal is taken from the decision of the Tax Court.
The question presented is whether the taxpayer is entitled to an allowance for percentage depletion with respect to its operations in the extraction and processing of coal from culm or refuse banks which it leased for that purpose from the owner and operator of a coal mine. The claim for depletion allowance is based upon Section 23(m)*fn1; Section 114(b) (4) (A) and (B) as amended,*fn2 of the Internal Revenue Code; and Section 29.23(m)-1 of Treasury Regulations 111.*fn3
The facts, which are not in dispute, may be summarized as follows:
The taxpayer, a Pennsylvania corporation, entered into an agreement with Turkey Run Fuels, Inc., on February 11, 1941, whereby it leased from Turkey Run, the owner, culm or refuse banks of material which Turkey Run had theretofore thrown aside in the operation of its anthracite mines. The lease was to run for ten years or a shorter period if the marketable coal was earlier exhausted from the refuse piles. The taxpayer was to pay a minimum annual rental of $24,000 and was granted the right to remove all coal from the refuse piles.It also agreed to pay all taxes on improvements and on the coal shipped, but not on the lands.
The taxpayer, in order to extract the coal from the culm or refuse banks, and to wash, size and load it for shipment, erected an anthracite breaker and installed other equipment and machinery at a cost to it of approximately $150,000. It then proceeded with the operations enumerated, during the taxable years.
In its return for the fiscal year ended June 30, 1943, the taxpayer computed depletion on a percentage basis, and claimed a deduction of about $22,000; in its return for the fiscal year ended June 30, 1944, the taxpayer elected to take depletion on a percentage basis, but did not claim the deduction because the question was being contested by the taxpayer for the earlier years. After the Commissioner disallowed the deduction for depletion for the taxable year ended June 30, 1943, and determined a deficiency upon other grounds for the fiscal year ended June 30, 1944, the taxpayer filed a petition for review of the Commissioner's determination with the Tax Court covering both years.
The Tax Court upheld the Commissioner in his determination of deficiencies in excess profits tax of $21,552.99 and $5,230.79 for the fiscal years ended June 30, 1943, and 1944, respectively.
The Commissioner contends (1) a culm bank is not a "mine"; (2) extraction of coal from a culm bank is not "mining"; and (3) there is absent the requisite "economic interest" for depletion allowance.
The taxpayer takes the position (1) whether a culm bank is a "mine" is immaterial; (2) extraction of coal from a culm bank is "mining" since Congress, in amending Section 114(b) (4) by adding paragraph (B), broadened the definition of the word "mining" to include not merely the extraction of ores or minerals from the ground, but also the ordinary treatment processes normally applied by coal mine operators such as cleaning, breaking, sizing and loading for shipment; and (3) it has the requisite "economic interest."
Certain well-established principles are applicable in the determination of the issue. They are:
In order to determine whether a taxpayer is entitled to an allowance for depletion under Section 23(m) we must recur to the fundamental purposes of the statutory allowance. The deduction is permitted as an act of grace. The depletion allowance permitted as a deduction from the gross income in determining the annual taxable income of mines represents the reduction in the mineral content of the reserves from which the product is taken. The reserves are recognized as wasting assets and the depletion allowance is intended as a compensation for the part used up in production. United States v. Ludey, 1927, 274 U.S. 295, 47 S. Ct. 608, 71 L. Ed. 1054; Helvering v. Bankline Oil Co., 1938, 303 U.S. 362, 366, 58 S. Ct. 616, 82 L. Ed. 897.
The right to depletion allowance does not depend upon the particular legal form of interest enjoyed by the taxpayer in the mineral content of the land. It is sufficient if one, as lessor or lessee, has an "economic interest" in the mineral deposit "in place" which is depleted by production. The phrase "economic interest" is not to be taken as embracing a mere economic advantage derived from production, through a contractual relation to the owner, by one who does not have a capital investment in the mineral deposit. There must exist some element of "ownership" in the mineral deposit "in place" and a right to share in its production in order to entitle one to depletion allowance. The mineral deposit "in place" must be a reservoir of capital investment of the taxpayer claiming the allowance. Lynch v. ...