Before MARIS and KALODNER, Circuit Judges, and WORTENDYKE, District Judge.
This is an appeal by the Government from a judgment in favor of the taxpayer, Turkey Run Fuels, Inc., in a suit brought by the taxpayer in the District Court for the Eastern District of Pennsylvania to recover allegedly excessive income taxes paid pursuant to deficiency assessments for the fiscal years ended August 31, 1948 and August 31, 1949. The facts were stipulated and so far as pertinent are as follows:
The taxpayer is a Pennsylvania corporation and was organized on October 31, 1939. Its stock is all owned by the West Shenandoah Land Co., another Pennsylvania corporation. On December 30, 1939, the latter deeded the property involved here to the taxpayer in return for the taxpayer's stock. The property covered by the deed is the southerly portion of that known as the Moore & Miller Tract. The West Shenandoah Land Co. had acquired that tract from the individual owners on December 1, 1938, in an exchange whereby the owners received stock in the West Shenandoah Land Co. in proportion to their respective interests in the tract. Those owners were then holding the tract as heirs or the trustees for heirs of the two individuals who had acquired title to the tract in 1863 and 1865.
The mining of coal from the Moore & Miller Tract first began in 1870 through the operation of three principal collieries known as West Shenandoah, Turkey Run and Kohinoor. Subsequently, in 1874, the Moore & Miller Tract was leased to the Philadelphia and Reading Coal & Iron Company, and the latter company conducted mining operations thereon until 1938 when it instituted bankruptcy proceedings and had its lease cancelled prior to December 1st of that year. From December 1, 1938 until sometime in 1941, the portion of this tract which is now owned by the taxpayer under its deed of December 30, 1939, was not actively operated. During that period the property comprised underground coal workings which had been worked by the prior lessee, coal, culm and refuse banks placed on the surface of the property by the prior lessee, and coal stripping areas. The coal, culm and refuse banks were accumulated prior to October 1932 and principally between 1902 and 1919.
Under a lease executed February 11, 1941, the taxpayer leased to the Kohinoor Coal Company certain coal, culm and refuse banks which had been accumulated during the course of previous mining operations on the property. This lease and the parties are those referred to in the case of Kohinoor Coal Co. v. Commissioner of Internal Revenue, 3 Cir., 1948, 171 F.2d 880, certiorari denied 337 U.S. 924, 69 S. Ct. 1168, 93 L. Ed. 1732. On November 15, 1945 the same parties entered into a new lease. The taxpayer on January 13, 1947, leased the remaining portion of its property to the Mahanoy Valley Coal Company. On February 10, 1948 that lease was assigned to the Gilberton Coal Company.
During the two taxable years in question all of taxpayer's property was operated under the leases. The lessees were engaged in three operations, namely, the extraction of coal from underground coal workings, the extraction of coal from coal, culm and refuse banks and from coal stripping operations. During each of the taxable years in question the taxpayer received a majority of its coal royalty income from coal extracted from coal, culm and refuse banks by the lessees. The taxpayer, in its income tax returns for these two years, claimed a deduction for percentage depletion based upon 5 percent of the coal royalties earned during the year from coal extracted from the coal, culm and refuse banks as well as from the underground workings and the stripping operations. The Commissioner allowed the deductions for percentage depletion on royalties due from coal extracted from the underground workings and from the stripping operations but disallowed the depletion deductions claimed on royalties due to coal extracted from the coal, culm and refuse banks. He assessed a deficiency for the taxable year 1948 in the sum of $1,655.58 with interest and for the taxable year 1949 in the sum of $1,603.73 with interest. These deficiencies, which were largely due to the disallowance of a portion of the claimed depletion deductions, were paid on September 3, 1952. Claims for refund of taxes attributable to the disallowed deductions were filed on December 15, 1952, and were disallowed on July 2, 1953. The present suit was instituted on July 31, 1953. On consideration of the stipulated facts the district court concluded that the taxpayer was entitled to the depletion deductions with respect to the coal extracted from the coal, culm and refuse banks which the Commissioner had disallowed. The court accordingly entered judgment in favor of the taxpayer. 139 F.Supp. 43. The present appeal by the Government followed.
The appeal raises the issue whether the district court erred in holding that the taxpayer was entitled to depletion deductions under section 23(m) of the Internal Revenue Code of 1939, 26 U.S.C. § 23(m)*fn1 from royalties received by the taxpayer for coal extracted from coal, culm and refuse banks on its property which had been created many years before in mining operations by lessees of its predecessors in title.
In Kohinoor Coal Co. v. Commissioner of Internal Revenue, 3 Cir., 1948, 171 F.2d 880, certiorari denied 337 U.S. 924, 69 S. Ct. 1168, this court had before it a similar claim by a lessee of the present taxpayer. Under its lease Kohinoor had merely the right to load, prepare and take away the coal contained in the coal, culm and refuse banks. We held that since Kohinoor had no economic interest in the coal in place, its interest being confined solely to the coal in the culm or refuse banks which had already been extracted from the earth, it was not entitled to the depletion allowance granted with respect to coal mines by the Internal Revenue Code. Our decision was based upon the firmly settled propositions that an economic interest in a mine is a prerequisite to the allowance of a depletion deduction from the income derived therefrom,*fn2 and that a culm or refuse bank deposited on the surface in the course of mining operations is not itself a mine within the meaning of section 23(m) of the Internal Revenue Code of 1939.*fn3 We fully adhere to our decision in the Kohinoor case and to the legal premises upon which it was based. However, for reasons which will be stated we cannot accept the argument of the Government that the legal rules applied in that case are applicable here.
In the present case the taxpayer is the owner of the coal, culm and refuse banks in question, of the land upon which they lie and of the coal mines from which they were extracted. It, therefore, has the economic interest therein which the Internal Revenue Code requires and which Kohinoor as lessee did not have. It is immaterial here that the coal, culm and refuse banks are not themselves mines since the actual mines from which they were extracted are also owned by the taxpayer. The extraction of coal from the banks was but a final step in the process of mining, as defined in section 114(b) (4) of the Internal Revenue Code of 1939, 26 U.S.C. § 114(b) (4) (A, B),*fn4 which began when the material comprising the banks was extracted from the mines and deposited on the surface. The royalties received by the taxpayer for the coal extracted from the banks therefore constituted income from mining from which the depletion allowance was deductible.
The fact that an interval of time elapsed between the original mining from the earth of the material comprising the banks and the final extraction of the coal from the banks is immaterial. Commissioner of Internal Rev. v. Kennedy Min. & M. Co., 9 Cir. 1942, 125 F.2d 399. In the case just cited, which involved a depletion claim in connection with gold mining, Juge Mathews said at page 400:
"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 treatment was income from the mine, just as was that derived from their first treatment."
We are in accord with these views of our brethren of the Ninth Circuit. The Government, however, urges that it must appear that at the time the operators of the mine brought to the surface the material comprising the banks they had a present intention to extract the coal from the bank material. For this proposition it cites a dictum in Chicago Mines Co. v. Commissioner of Internal Rev., 10 Cir. 1947, 164 F.2d 785, 787, certiorari denied London Exchange Min. Co. v. C.I.R., 333 U.S. 881, 68 S. Ct. 913, 92 L. Ed. 1156. If by this argument it is meant that there must be shown a present intention to proceed with the extraction of the coal from the bank at a definite future time we do not agree. It has long been recognized that the culm and waste banks in the anthracite coal fields of Pennsylvania contain valuable quantities of coal which merely require favorable market conditions to make their extraction economically feasible.*fn5 It may, therefore, be fairly assumed without proof of a specific subjective intent that the operators of coal mines who deposited this material in banks upon their surface lands did so with the intention of giving it further treatment for the extraction of coal just as soon as and whenever it might prove profitable to them to do so. For certainly one who is operating a mine for profit intends to make every legitimate profit therefrom which is available to him both immediately and in the future. We think it is clear therefore that the extraction of coal by the taxpayer from these coal, culm and refuse banks was but a continuing step in the original mining operation and that the royalties derived from such extraction accordingly constituted income from mining operations within the meaning of the Internal Revenue Code.
We are satisfied that this is so even though the taxpayer was not the owner of the mines when the material constituting the banks was deposited. For as the Court of Appeals for the Ninth Circuit said in New Idria Quicksilver Mining Co. v. Commissioner of Internal Rev., 1944, 144 F.2d 918, 921, a case involving this very question, "There is no legal distinction between the rights of the successor in interest and the rights of the original owner with respect to depletion claimed."
The cases of Atlas Milling Co. v. Jones, 10 Cir., 1940, 115 F.2d 61, certiorari denied 312 U.S. 686, 61 S. Ct. 613, 85 L. Ed. 1124; Consolidated Chollar G. & S. M. Co. v. Commissioner of Internal Rev., 9 Cir., 1943, 133 F.2d 440; Chicago Mines Co. v. Commissioner of Internal Rev., 10 Cir., 1947, 164 F.2d 785, and Hoban v. Viley, 9 Cir., 1953, 204 F.2d 459, upon which the Government relies, are clearly distinguishable from the present case since the taxpayers in those cases, just as in the Kohinoor case, were not the owners or successors in interest of the owners of the mines from which the tailings or bank material had come. They, therefore, did not have the requisite economic interest in the mine to support their depletion claims. We think that the same is true of London Extension Mining Co. v. Commissioner of Internal Revenue, 10 Cir., 1947, 164 F.2d 785, a companion case to the Chicago Mines Co. case. But to the extent that the London case denied a depletion allowance to a taxpayer which had an economic interest in the mine from which the material in the bank had come it is in conflict with the rule of the Kennedy and New Idria cases, with which we are in accord, and we do not follow it.
The judgment of the district court will ...