13 T.C. 448 (1949), 16270, Morrisdale Coal Min. Co. v. C.I.R.

Docket Nº:16270.
Citation:13 T.C. 448
Opinion Judge:VAN FOSSAN, Judge:
Attorney:George E. H. Goodner, Esq., and Scott P. Crampton, Esq., for the petitioner. Karl W. Windhorst, Esq., for the respondent.
Judge Panel:DISNEY, J., dissenting:
Case Date:September 30, 1949
Court:United States Tax Court

Page 448

13 T.C. 448 (1949)




No. 16270.

United States Tax Court.

September 30, 1949

1. Taxpayer, an operator of coal mines for many years, in June 1940 leased certain property for the purpose of developing a coal mine thereon. In March 1942 it leased additional contiguous property containing the same coal seam for the same purpose. About May 1940 it commenced development on the first property, which was extended by the end of the development period, September 30, 1942, over a substantial area in the coal seam of the second property, all the coal therefrom being removed through the slope outlet in the first property. Held, that the property under the two leases constituted a property and that a part of the taxpayer's gross income from the sale of coal from such property, known as the Maxton Coal Mine, received in 1943, is a ‘ separate class of income‘ as defined in section 721(a)(2)(C), I.R.C.

2. Amount of net abnormal income of taxable year to be attributed to prior years, determined.

George E. H. Goodner, Esq., and Scott P. Crampton, Esq., for the petitioner.

Karl W. Windhorst, Esq., for the respondent.

Page 449

The Commissioner advised petitioner by letter dated August 1, 1947, of his determination of overassessments of $4,008.09 and $5,428.80 in petitioner's income and excess profits taxes, respectively, for the year 1943, and notified it at the same time, in accordance with section 732 of the Internal Revenue Code, of his rejection of petitioner's claim for relief under section 721 of the Internal Revenue Code, filed May 24, 1945.

The only question involved is whether the petitioner received in 1943, from the operation of a certain coal mine, net abnormal income of the class of income described in section 721(a)(2)(C) of the code, which is attributable to prior years.


Petitioner, a Delaware corporation, was organized in 1915. Its principal office is located in Philadelphia, Pennsylvania. Since 1932 it has engaged in the mining of bituminous coal and the sale thereof. It filed its returns for the years 1939 to 1943, inclusive, with the collector of internal revenue for the first district of Pennsylvania.

On June 28, 1940, petitioner entered into a lease with Maxton Coal Co. whereby it acquired the right to mine coal from certain property described therein, located in Clearfield County, Pennsylvania. Petitioner entered into a second lease on March 2, 1942, with Philipsburg Coal & Land Co. whereby it acquired the right to mine coal on certain land described therein, which land was immediately adjacent to the property leased from the Maxton Coal Co. Neither of these properties had previously been operated by petitioner, but it had established by drilling that such properties contained coal known as the ‘ B‘ seam, or Lower Kittanning seam, running about 150 feet below the surface of the leased properties, hereinafter referred to as the Maxton property. The Maxton Coal Co. lease specifically provides that the lessee may mine coal from other lands and transport the same ‘ through and over‘ and demised property, subject to the terms and conditions stated therein. The Philipsburg Coal & Land Co. lease provides, in part, as follows:

* * * It is expressly understood and agreed by and between the parties that the Lessee has in great part constructed and is completing the construction of a slope transportation outlet from the ‘ B‘ seam to the surface, tipples, railroad sidings, air shaft, bore-holes for pumping and power purposes, power houses, storage house and other mining improvements on land and ‘ B‘ seam of coal belonging to Maxton Coal Company and adjoining the herein demised premises, and the coal from the herein demised premises will be recovered by extension of workings in the ‘ B‘ seam of coal from said Maxton lands into the ‘ B‘ seam of coal upon the herein demised premises, and by use of the mining improvements constructed and being completed as aforesaid; and the parties

Page 450

hereto covenant with each other that such extensions of the workings from the Maxton lands and premises into the lands and premises of the Lessor herein, and the use of the facilities for mining, recovering, transporting and shipping the coal of the Lessor herein, during the term of this lease or any renewal thereof, is permitted, * * *

In 1940 the petitioner operated under lease three other properties, known as Cunard Slope, Morrisdale Shaft No. 1, and Morrisdale Shaft No. 3. The Coal in the first mine was reached by a slope or incline, whereas the coal in the other two mines was reached by a vertical shaft. The Maxton property was acquired because it was anticipated that the coal in these mines would be exhausted within the near future. The other mines operated by petitioner were separate mines and in no way connected with the Maxton Slope Mine.

In May 1940, petitioner began the construction of a 33 per cent slope through which to remove the coal from the Maxton property. The slope is located on the property leased from the Maxton Coal Co. The coal was not reached by the slope until the latter part of December 1940. Upon reaching the coal, it was necessary to build a pit for dumping the coal, but work was at once begun to develop the coal seam. After a drive of about 50 feet to the east, work was begun both north and south in the coal seam in order to develop the mine. No coal, however, was taken out of the mine during the month of December 1940. After the execution of the second lease the development work which had reached the boundary line between the two properties was intended south into the Philipsburg Coal & Land Co. property more than 400 feet, at which point the development was extended both to the east and west approximately 1,400 feet by September 30, 1942.

The records with respect to Maxton Slop Mine were kept separate from those relating to petitioner's other properties.

The following table shows the gross sales, cost of sales, and gross profits with respect to all bituminous coal, irrespective of its source, sold by petitioner for each of the years 1939 to 1943, inclusive:

Cost of goods

Year Gross sales sold Gross profit

1939 $847,401.00 $818,580.75 $28,820.25

1940 931,324.27 876,646.02 54,678.25

1941 1,086,919.94 996,039.62 90,880.32

1942 1,286,495.81 1,120,905.60 165,590.21

1943 1,605,296.52 1,313,759.37 291,537.15

The following table shows the number of tons of bituminous coal mined from all of petitioner's properties, either by it or by third parties under contract, the average selling price per ton for the coal, and the gross sales therefrom for each of the years 1939 to 1943, inclusive:

Gross sales

(tons multiplied

Average selling by average

Year Tons price per ton selling price)

1939 354,558 $2.0278 $718,972.71

1940 385,459 2.2267 855,988.80

1941 371,060 2.3819 883,327.81

1942 373,611 2.6101 975,162.07

1943 436,165 3.0218 1,318,003.40

Page 451 The above coal taken from the various mines was not all of the same quality. The various mines were not equipped with the same kind of equipment for mining coal. They were not all mines of the same kind. All of the coal taken from the various mines did not sell at the same price, nor was it all sold f.o.b. at a certain point. The Maxton Slope Mine was a mechanized mine, whereas the other mines were not. The number of tons sold, gross sales, average selling price per ton, cost of sales, and gross profit with respect to bituminous coal sold by petitioner mined from its properties Morrisdale Shaft No. 1 and No. 3 and Cunard Slope, excluding the Maxton Slope Mine, for the year 1943 were as follows:

Average Gross sales

selling price (f. o. b. Cost of

Tons sold per ton Royalties mines) less goods sold Gross profit

(f. o. b. paid royalties


191,918 $3.0219 $14,199.75 $565,754.02 $521,580.43 $44,173.59

The following table shows the number of tons sold, the gross sales, average selling price per ton, cost of sales, and gross profit, as reported in its returns, with respect to bituminous coal sold by petitioner mined from the Maxton Slope Mine (‘ B‘ seam) for each of the years 1941, 1942, and 1943:

1941 1942 1943

Tons sold 12,842.00 78,508.65 203,909.80

Gross sales $31,135.46 $201,103.18 $616,138.53

Average selling price per ton 2.4245 2.5615 3.0216

Royalties paid 1,137.70 6,758.55 17,540.82

Gross sales less royalties 29,997.76 194,344.63 598,597.71

Cost of goods sold 24,103.19 146,188.72 429,334.83

Gross profit 5,894.57 48,155.91 169,262.88

The operation of the Maxton Slope Mine was checked for the respondent by a mining engineer and an internal revenue agent, and they agreed with petitioner's officials that the development of the Maxton Slope ended on September 30, 1942. The total amount of development costs as of September 30, 1942, shown on the books of petitioner was $65,549.65. Adjustments, agreed Page 452 to by the petitioner, were made by the internal revenue agent, as follows:

Development costs to Sept. 30, 1942 $65,549.65

Depreciation— 1940 125.70

Depreciation— 1941 $1,910.23

Depreciation— 1942 28,003.07



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