229 F.2d 539 (9th Cir. 1955), 14559, Usibelli v. C.I.R.
|Citation:||229 F.2d 539|
|Party Name:||Emil USIBELLI and Rose P. Usibelli, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.|
|Case Date:||December 14, 1955|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
A. R. Kehoe, Jones & Grey, Seattle, Wash., for appellant.
H. Brian Holland, Asst. Atty. Gen., I. Henry Kutz, Ellis N Slack, Lee A. Jackson, Robert B. Ross, Special Assts. to Atty. Gen., for appellee.
Richard L. Levy, William T. Coleman, Jr., Dillworth, Paxson, Kalish & Green, Philadelphia, Pa., Edgar J. Goodrich, Lipman Redman, Guggenheimer, Untermeyer, Goodrich & Amram, Washington, D.C., John W. Bodine, Philadelphia, Pa., counsel for Jeddo-Highland Coal Co., and the Anthracite Institute, Drinker, Biddle & Reath, Philadelphia, Pa., of counsel, amici curiae.
Before STEPHENS, HEALY, and POPE, Circuit Judges.
STEPHENS, Circuit Judge.
This case is before us on petition for review of a decision of the Tax Court of the United States and involves a claimed allowance of a depletion deduction under Section 23(m) 1 of the Internal Revenue Act of 1939 to petitioner for certain government coal lands which he strip-mined pursuant to a contract with the United States Army. Except where otherwise stated in this opinion, the term 'petitioner' refers to petitioner Emil Usibelli.
On April 5, 1946, special permission was granted by the Secretary of the Interior to the United States Army to mine coal from specified government land in Alaska. Unless otherwise terminated, the permit would expire six months after the cessation of hostilities in World War II as determined by Presidential proclamation or concurrent Congressional resolution. the actual mining could be done either by the actual mining could be done either by the Army or by private parties under contract with the Army.
On July 1, 1946, the Army entered into a one-year contract with petitioner (Emil Usibelli) to strip-mine coal on the specified government lands at Suntrana, Alaska, for supplying coal to the Army at Ladd Field, Alaska. The coal was to consist of 40, 000 tons of mine run and 30, 000 tons of lump nut to be placed on railroad cars at the mine, graded and screened. If the contract remained in effect throughout its term, petitioner was to be paid a total amount of $362, 500, computed at $4.75 per ton of mine run, and $5.75 per ton of lump nut. 2 A minimum of 5, 600 tons was to be delivered each month but the government could reduce the specified quantities to be delivered in the event its requirements should change, and the contract could be terminated in whole or from time to time in part whenever the contracting officer should determine such action to be in the best interest of the government. 3
Petitioner bid on and obtained a similar contract for the fiscal year 1948 under which he was to be paid $577, 000, computed at $5.22 per ton of mine run and $6.22 per ton for lump nut and stoker coal. Petitioner conducted mining operations under the contracts during the taxable years 1947 and 1948.
In 1947 he filed a separate return with the Collector of Internal Revenue for the District of Washington in which he claimed a depletion deduction from his gross income of $1, 476.69.
In 1948 petitioners, Emil Usibelli, and his wife, Rose Usibelli, filed a joint return in which they claimed a depletion deduction of $5, 648.24. The Commissioner denied both deductions on the ground that petitioner had no such interest in the coal in place which he was mining for the Army as would entitle
him to a deduction for its depletion. The Tax Court upheld the Commissioner, and the taxpayers petition this court for a review of that decision.
At the outset it is well to have in mind that there is no contention that the coal in place would, or might, be depleted below the amount of coal to be extracted even if the contract should be allowed to remain in force until the total contractual tonnage had been extracted.
Section 23(m) of the Internal Revenue Act of 1939 4 provides in part:
'Deductions from gross income. In computing net income there shall be allowed as deductions
'(m) Depletion. In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case * * *.'
The amount of the depletion allowance for coal mines is contained in Section 114, 5 viz:
'* * * (A) In general. The allowance for depletion under section 23(m) shall be, in the case of coal mines, 5 per centum * * * of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. * * *'
These sections constitute recognition by Congress that extractive industries, unlike the manufacturing industries, look to their profits from the sale of a portion of their capital assets with the result that each sale results in a corresponding depletion in the remaining capital assets. The depletion deduction allowed by these sections is not to be construed, as petitioner contends, as a reward to those persons who actually mine the coal for the risks inherent in extraction. In common with industry generally those engaged in extraction of minerals on a for-hire basis receive their tax benefit through depreciation and obsolescence allowances, 6 and not through an allowance for the depletion of the mineral deposit on which they happen to be working.
In order that persons investing in mineral deposits could fairly recover their investment, Congress originally provided that the cost of the asset (in the instant case, the coal in place) be recovered over the expected life of the mine, and where the mine had been acquired prior to 1913, allowed the value as of March 1, 1913, to be so recovered. During the first World War the need for increased exploitation of natural resources resulted in the allowance by the Revenue Act of 1918, 40 Stat. 1057, of the value of the deposit 'at the date of the discovery'. Discovery depletion served the purpose of allowing the discoverer of a new mineral deposit to recover not only his actual costs but also the much larger appreciated value of the property at the time its profitability was established. 7 The practical difficulty inherent in the administration of each of these methods for depletion allowance is that of fairly determining the value of the mineral deposit when such determination rests upon factors extremely difficult of accurate ascertainment such as the size and quality of the deposit, the market conditions relative to the sale of the product, and the fair rate of return to be allowed on the capital investment. Since without extraction there is no depletion, the ideal solution to the problem was to devise a method whereby depletion would depend directly upon actual production. This was ultimately accomplished as in the present
Act 8 by determining the average percentage of the gross income from each mineral which was actually being allowed under the former methods, and allowing that average of the gross income from extraction as a depletion deduction from the gross income of entitled persons. In the case of coal, the applicable deduction under the statute here in force was set at 5% 9 of the gross income attributable to the extraction of the coal. Although providing a more workable method of administration, the granting of an arbitrary deduction of a percentage of gross income in no way altered the basic theory that the deduction be allowed to the owner of wasting assets as compensation for that part of his assets which are used up in production. 10
This theory is fundamental in determining those entitled to the deduction, since basically a taxpayer must possess a sufficient economic interest in the mineral being produced in order to avail himself of the deduction. This principle was succinctly stated by the Supreme Court in Kirby Petroleum Co. v. Commissioner, 1946, 326 U.S. 599, 603, 66 S.Ct. 409, 411, 90 L.Ed. 343:
'* * * Only a taxpayer with an economic interest in the asset, here the oil, is entitled to the depletion. Palmer v. Bender, 287 U.S. 551, 557, 53 S.Ct. 225, 226, 77 L.Ed. 489; Thomas v. Perkins, 301 U.S. 655, (659), 57 S.Ct. 911, 913, 81 L.Ed. 1324. By this is meant only that under his contract he must look to the oil in place as the source of the return of his capital investment. * * * The test of the right to depletion is whether the taxpayer has a capital investment in the oil in place which is necessarily reduced as the oil is extracted. See Anderson v. Helvering, 310 U.S. 404, 407, 60 S.Ct. 952, 954, 84 L.Ed. 1277.' 11
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