19 T.C. 208 (1952), 27605, Morrisdale Coal Min. Co. v. C.I.R.

Docket Nº:27605.
Citation:19 T.C. 208
Opinion Judge:RICE, Judge:
Party Name:MORRISDALE COAL MINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Attorney:George E. H. Goodner, Esq., for the petitioner. Edwin P. Friedberg, Esq., for the respondent.
Case Date:November 12, 1952
Court:United States Tax Court
 
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Page 208

19 T.C. 208 (1952)

MORRISDALE COAL MINING COMPANY, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

No. 27605.

United States Tax Court.

November 12, 1952

1. During the taxable years, petitioner had independent contractors strip-mine fringe coal on lands under lease to petitioner. Held, under all the facts, the independent contractors did not acquire an economic interest under their contracts; and respondent erred in computing percentage depletion by reducing petitioner's gross income by an amount equal to that paid the independent strip-mining contractors.

2. During 1946, petitioner, on a calendar year, accrual basis, deducted from its gross income the amount paid its employees during 1946 as vacation pay for the period June 1, 1945, through May 31, 1946. In addition, petitioner now claims it is entitled to deduct seven-twelfths of the amount paid its employees in 1947 for the period June 1, 1946, through May 31, 1947, on the ground that such amount was due and owing at the close of 1946 under the terms of the union contract existing with the employees at that time. Held, under all the facts, there was no fixed contract covering the vacation period, June 1, 1946, through May 31, 1947, at the close of 1946; and there was no fixed and definite liability at the close of 1946.

3. The increase in petitioner's accumulated earnings and profits, resulting from a decision of this Court involving petitioner's 1943 excess profits tax, determined.

4. Excess profits tax relief under section 721(a)(2)(C) of the Code due to abnormal income attributable to prior years, determined.

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George E. H. Goodner, Esq., for the petitioner.

Edwin P. Friedberg, Esq., for the respondent.

RICE, Judge:

The respondent determined deficiencies in excess profits tax for the taxable years 1944 and 1945 in the amounts of $60,498.21 and $47,314.33, respectively, and a deficiency in income tax for the taxable year 1946 in the amount of $4,969.81. Petitioner claims relief from excess profits tax liability for the years 1944 and 1945 under section 721 of the Internal Revenue Code, which relief respondent has denied.

The issues to be decided are: (1) whether petitioner should exclude from ‘ gross income from the property,‘ in computing its percentage depletion deduction amounts paid to independent contractors for strip-mining ‘ fringe‘ coal; (2) whether petitioner is entitled to deduct from its gross income in 1946 a part of the vacation pay paid its employees in 1947 for the vacation period from June 1, 1946, to May 31, 1947, as having accrued during 1946; (3) the amount of adjustment to be made in petitioner's accrued earnings and profits at the beginning of each of the years here in question arising from the decision of this Court in a case involving petitioner's excess profits tax liability for 1943; and (4) the amount of relief, if any, to which petitioner is entitled under section 721 of the Internal Revenue Code.

In paragraph 4(c) of the petition, error is alleged on the part of the respondent for failure, in arriving at the excess profits tax liability

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for 1944, to give the petitioner the benefit of an unused excess profits credit carry-back from 1946 of not less than $51,301.74; and, in paragraph 4(d) of the petition, error is also alleged on the part of respondent in failing to carry over to 1945 any unused portion of such carry-back. Petitioner failed to argue this issue in its brief or its reply brief, merely stating that it was not abandoning this issue and would argue it under Rule 50.

In his brief respondent conceded that petitioner was entitled to a net operating loss carry-over from Morrisdale Supply Company for the taxable year 1945 following a merger of that company with petitioner.

ISSUE 1.

FINDINGS OF FACT.

Petitioner is a corporation organized under the laws of Delaware in 1915 with its principal office at Philadelphia, Pennsylvania. It has been engaged in the mining and sale of bituminous coal since 1932. Tax returns for the years here involved were filed with the collector of internal revenue for the first district of Pennsylvania. Petitioner kept its books and records on a calendar year accrual basis. Its excess profits credit was computed on the invested capital method.

During the years 1944, 1945, and 1946, petitioner was engaged in the mining and selling of coal from leased properties. Petitioner's operations were what is termed ‘ deep mining,‘ and it was not equipped to mine the coal to the extreme limit or edge of the coal seams where such seams outcropped on the side of a mountain or slope. Petitioner, therefore, contracted to have this fringe coal, on property which it had under leases, mined by independent contractors who furnished their own equipment. Such practice was customary in mountainous coal mining areas such as that operated by petitioner.[1]

Under the fringe stripping contracts, the independent contractors

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agreed to mine the coal covered by the contract and deliver it to petitioner for a specified price per ton.

In its Federal tax returns for the years in question, petitioner took depletion deductions on coal mined by the independent contractors in the following amounts:

1944 $5,911.10

1945 16,286.96

1946 15,995.71

Such amounts not only reflected depletion on fringe coal mined by independent contractors, but also depletion on deep coal mined for petitioner by independent contractors. In his statutory notice of deficiency, respondent disallowed the percentage depletion allowances claimed by petitioner as deductions from gross income insofar as they were attributable to amounts paid by petitioner to the independent contractors. At the hearing and subsequent thereto, respondent conceded that petitioner is entitled to a percentage depletion allowance on amounts paid by petitioner for deep coal mined by independent contractors but still determined that amounts paid by petitioner to independent contractors for strip-mining of fringe coal should be excluded from gross income from the property in computing percentage depletion. Petitioner entered into a contract with Robert Bailey on May 1, 1941, whereby the latter undertook to strip-mine ‘ E‘ and ‘ D‘ seams of coal on land of the Maxton Coal Company leased by petitioner from Wigton Coal Company (hereinafter referred to as Wigton) and to place in railroad cars ‘ for the use and benefit of * * * (petitioner) all coal recovered from said seams.‘ Such contract further provided: It is contemplated that the mining operations will be conducted in the outcrop of said seams of coal as said outcrop occurs in the vicinity of the present Maxton slope, and that the delivery of said coal into railroad cars will be by means of trucks over wagon or truck or truck roads to be built and maintained by Robert Bailey; and that the coal recovered and which the Morrisdale Coal Mining Company agrees to accept in railroad cars shall be of good, merchantable quality, satisfactory to the Morrisdale Coal Mining Company, * * *. Robert Bailey agrees to prosecute his operations under this contract continuously and with effect so as to load, if required by the Morrisdale Coal Mining Company, not less than 100 tons per day, if coal in the seams is available to produce so much and if the market requirements of Morrisdale Coal Mining Company shall require such quantity of coal. If the market requirements of Morrisdale Coal Mining Company for said coal shall not be sufficient to keep Robert Bailey working at a capacity of 100 tons per day for five days per week, he shall have the right to terminate this contract without liability on account of such termination. This contract shall continue for a period of two years from the date hereof, unless Robert Bailey suspends operations for a period of ten days or more at any Page 212 one time, in which event the Morrisdale Coal Mining Company shall have the right to terminate this agreement; * * *. The actual site of operations by Robert Bailey under this contract shall at all times be fixed and determined by the Morrisdale Coal Mining Company. Morrisdale Coal Mining Company shall not be liable to Robert Bailey for any inability on its part to market the coal Robert Bailey may, might or could produce from the contemplated area of operations. In Consideration Whereof, the Morrisdale Coal Mining Company agrees to pay Robert Bailey for each and every net ton of 2000 pounds net weight of coal delivered into railroad cars, as aforesaid, $1.30 per net ton; this rate of compensation shall require Robert Bailey to take an over-burden on said coal up to 22 1/2 feet of thickness; the price or compensation per ton to Robert Bailey for coal recovered from the seam where the over-burden exceeds 22 1/2 feet shall be the subject of negotiation between the parties, * * *. It is understood and agreed that under and by the terms of this agreement, Robert Bailey is an independent contractor and shall take care of all workmen's compensation, social security and unemployment compensation as may be required by law. * * * payment shall be made on the Saturday following the last day of the calendar month for all coal delivered between the first and the fifteenth days of the preceding calendar month; and payment for all coal delivered, as aforesaid, between the fifteenth and last days of the preceding calendar month shall be paid on the first Saturday following the fifteenth day of the succeeding month. * * * By letter dated April 15, 1943, said contract was extended for 2 years and also stated the following: * * * the Agreement is extended to cover the strip...

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