The opinion of the court was delivered by: GRIM
The taxpayer in this case is the owner of coal land in Shenandoah, Schuylkill County, Pennsylvania, and 'coal, culm and refuse banks' located thereon, which have been accumulated over many years in the mining of the property. In recent years it has become profitable to extract and sell the coal from the banks.
The taxpayer plaintiff claimed a depletion allowance on the income from the sale of the coal from the refuse banks in its 1948 and 1949 income tax returns. The Commissioner of Internal Revenue disallowed the claims for depletion allowance and assessed deficiencies against the plaintiff. Plaintiff paid the alleged deficiencies and has filed this suit to recover them.
Section 23 of The Internal Revenue Code of 1939, former 26 U.S.C.A. § 23, provides:
'In computing net income there shall be allowed as deductions * * *
'(m) Depletion. In the case of mines * * * a reasonable allowance for depletion * * *.'
Section 114(b)(4)(A), former 26 U.S.C.A. § 114(b)(4)(A), provides:
'The allowance for depletion under section 23(m) shall be, in the case of coal mines, 5 per centum * * *.'
In 1870 John Gilbert and Peter W. Sheafer were joint owners of the land involved in the present case. In that year they started to mine coal from it. The mining has continued to the present time. Since the death of Gilbert and Sheafer their heirs and the heirs of their heirs have become the successors in the ownership of the land and the refuse banks thereon. On December 1, 1938, the Gilbert and Sheafer heirs conveyed title to the land and the banks to a corporation which they had formed, wholly owned by them, known as West Shenandoah Land Co. When the heirs conveyed the property to the corporation they received no money consideration, but instead each heir received stock in the corporation in exactly the same relative proportion as his ownership in the land had been. Later West Shenandoah Land Co. created a wholly owned subsidiary, Turkey Run Fuels, Inc., plaintiff herein, to which it conveyed title to the property on December 30, 1939. In 1948 and 1949 Turkey Run Fuels, Inc. was still the owner of the property and it still was a wholly owned subsidiary of West Shenandoah Land Co.
In Commissioner of Internal Revenue v. Kennedy Mining & Milling Co., 9 Cir., 1942, 125 F.2d 399 the taxpayer had been the owner and operator of a gold mine since before 1913. Beginning in 1914 and continuing to 1935 the taxpayer deposited mine tailings on its land which resulted from its mining and milling operations. The gold content of the tailings was not considered sufficient to be extracted profitably until 1935. In 1935 the taxpayer because of improved conditions started to rework the tailings to extract the gold therefrom. The Commissioner denied the taxpayer's claim to a depletion allowance, but the Board reversed the Commissioner and allowed the claim for depletion. The Circuit Court of Appeals affirmed, saying, 125 F.2d at page 400:
'The Board held that all income of the taxpayer during 1935 and 1936, whether from newly mined ores or from tailings, was income from the mine, and that, therefore, the taxpayer was entitled to deduct for depletion 15% of $ 665,745.29 for 1935 and 50% of $ 61,662.39 for 1936. The Commissioner contends that only so much of the taxpayer's income as was derived from newly mined ores was income from the mine; and that, since no net income was so derived, no deduction for depletion was allowable.
'The Commissioner's contention must be rejected. The tailings from which the taxpayer derived part of its gross income and all of its net income during 1935 and 1936 were ores. They were ores from the taxpayer's mine, just as were the newly mined ores which the taxpayer treated in 1935 and 1936. Income derived from the ores called tailings, as well as that derived from the newly mined ores, was income from the mine.
'It is true, but not material, that the ores called tailings were mined prior to 1935. The mining of ores and the receipt of income therefrom are seldom, if ever, simultaneous. The two events are usually months apart and not infrequently years apart. Thus income from a mine during a taxable year may, and usually does, include income from ores mined prior to that year.
'Nor is it material that these ores (now called tailings) were, prior to 1935, subjected to treatment whereby part of their gold content was removed. The ores so treated remained after such treatment, as they were before, the property of the taxpayer and were thereafter, as theretofore, ores from the taxpayer's mine. Income derived from their subsequent ...