Mullins v. Comm'r of Internal Revenue
| Decision Date | 17 July 1967 |
| Docket Number | 92488.,Docket Nos. 92487 |
| Citation | 48 T.C. 571 |
| Parties | CHARLES P. MULLINS AND PALACE MULLINS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTMORRISON MULLINS AND JUANITA MULLINS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Carl F. Bauersfeld and Robert Ash, for the petitioners.
Jack D. Yarbrough and Vallie C. Brooks, for the respondent.
Held, a partnership composed of petitioners had an economic interest in coal in place under two leases which entitled it to a deduction for percentage depletion, but had no economic interest in coal in place under a third lease because the lessor reserved the right to terminate it on 60 days' notice.
In these consolidated proceedings the respondent determined the following income tax deficiencies and additions to tax against the petitioners:
Some issues have been agreed to by the parties. The only issue for decision is whether the Mullins Coal Co., of which the petitioners were partners, had an economic interest in the coal in place under three leases so as to be entitled to a deduction for percentage depletion. The parties have agreed that our decision with respect to this issue will be determinative of the additions to tax under sections 6651(a) and 6654.
The parties have stipulated some of the facts. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Charles P. and Palace Mullins are husband and wife whose legal residence at the time their petition was filed herein was Clintwood, Va. For the years 1957, 1958, and 1959 they filed their joint Federal income tax returns with the district director of internal revenue in Richmond, Va.
Morrison and Juanita Mullins are husband and wife whose legal residence at the time their petition was filed herein was also Clintwood, va. For the years 1957, 1958, and 1959 they filed their joint Federal income tax returns with the district director of internal revenue in Richmond, Va.
During the years 1957, 1958, and 1959, Charles P. Mullins and Morrison Mullins (hereinafter called Charles and Morrison individually or petitioners collectively) operated as equal partners a partnership known as the Mullins Coal C. (hereinafter called the partnership) in Pound, Va. For each of the years in question, the partnership filed a partnership return with the district director of internal revenue in Richmond, Va.
For each of the years 1957, 1958, and 1959, the petitioners and the partnership reported their income for Federal income tax purposes on a cash basis.
During the years here involved, the partnership was engaged in the drift mining of coal under leases from the Virginia Iron, Coal & Coke Co. (hereinafter called V.I.C.) of Roanoke, Va. Drift Mining is an underground mining operation in which a horizontal coal seam is an underground mining operation in which a horizontal coal seam is reached by clearing away a part of the mountainside with a bulldozer. Two parallel tunnels are made into the coal seam, one for ventilation and the other for working space and the removal of coal. The coal is removed as the drift mine is driven into the mountain following the seam of coal. In drift mining the roof of the mine is supported by leaving pillars of coal in place and erecting wood supports at about 18-inch intervals, together with roof bolts.
The partnership entered into an oral lease with V.I.C. in 1957 whereby the partnership was granted the right to mine approximately 30 to 40 acres of coal in the Blair seam of coal in Wise County, Va. This oral lease was to remain in effect until all the coal in the area was mined or until it was no longer economically feasible for the partnership to mine it, and V.I.C. was to receive a royalty of 27 cents per ton for all coal produced under the lease. There was no mention of the party to whom the partnership had to sell the coal.
The partnership mined coal in the Blair seam during 1957 and most of 1958. It mined 12 to 15 acres of coal there before adverse mining conditions, namely, water and a bad roof, made mining both dangerous and unprofitable. The partnership then terminated its mining operations in the Blair seam. While V.I.C. encouraged the partnership to continue mining in this area, its engineers confirmed petitioners' opinion that mining the Blair seam was an unprofitable operation. Therefore, it made no effort to prevent the partnership from terminating the lease.
From approximately August 20, 1958, to the end of 1959, the partnership also produced coal mined under a written lease with V.I.C. covering a seam of coal known as the Bolling seam. This lease is set forth below in its entirety:
This Coal Lease, made this the 20 day of August, 1958, between VIRGINIA IRON, COAL & COKE COMPANY, hereinafter called the LESSOR, first party, and Charles P. Mullins & Morrison Mullins, hereinafter called the LESSEE, second party.
That for and in consideration of the payments to be made by the Lessee to the Lessor as hereinafter provided, and of the covenants and conditions to be performed, the Lessor doth, by these presents, lease and let unto the Lessee, subject to all of the terms hereof, so much of what is known as the Bolling seam of coal in, under and upon the Lessor's James Cantrell tract of coal on the waters of Meade Fork of Pound River in Wise County, Virginia, the area leased and the exterior lines thereof to be such as the Lessor's engineers may from time to time in their sole judgment assign to said Lessee, which area may be enlarged and/or decreased from time to time, together with such mining rights and privileges only for the mining and removal of the coal as are now vested in the Lessor by its title papers of record in said county.
Subject to all of the terms hereof, this lease is to continue in force until all the merchantable and mineable coal is mined and removed from the area assigned to the Lessee unless sooner terminated as herein provided. In event the Lessee concludes that he cannot operate the property profitably he has the right to terminate this lease upon 60 days written notice.
(1) To be careful in the use of fire in or near the woodlands, drifts, coal openings, slate dumps and improvements within or near the leased premises, and especially to so handle and dispose of waste from the mines as not to expose the coal seams to fire damages in event the slate and waste dumps shall now or later become ignited. Should fire threaten at any time the Lessee shall promptly take steps to combat the same and notify the Lessor or its duly authorized agents;
(2) To guard and protect from injury or trespass all openings made upon the leased premises during the life of this lease whether or not in actual operation, and generally to so handle the leased premises during the term hereof as to safeguard the interest of all concerned;
(3) To drive all main entries, rooms and other parts of the mine in a workmanlike manner according to the rules of good and customary mining, and strictly in keeping with the requirements of the Lessor's mining engineers, it being understood that the Lessor, at its election, will do or have done by its engineering department such mine engineering and such mine mapping hereunder as it may consider necessary for the proper development of the mine covered by this lease, including the giving or measurements and directions for the turning of rooms, entries, headings, etc., and the placing of centres herein;
(4) To keep accurate accounts and records of all coal produced upon or removed from said premises and to afford the Lessor or its agents access to such accounts and records whenever so requested;
(5) To pay Lessor for all coal produced upon or removed from said premises at the rate of 27 cents per ton for each and every ton of two thousand (2000) pounds thereof so produced and removed— according to actual weights— and all statements of the tonnage rendered Lessor to be verified by affidavit of the Lessee, all royalties to be paid either to the Lessor or its duly authorized agents not later than the fifteenth of each month for all coal mined during the preceding month;
(6) To operate leased premises with diligence and as continuously as market and other conditions may reasonably justify, allowance being made for interruptions by strikes, lockouts and other hindrances ordinarily regarded as beyond the control of the Lessee;
(7) The Lessee shall so conduct his operation hereunder as not to violate any rights of lateral or subjacent support of the surface belonging to persons other than the parties hereto, and to mine said coal and carry on all incidental work in all respects at the Lessee's own cost, the Lessor to be in no wise liable to any employees of the Lessee, nor any other person or persons, nor for damage resulting from the Lessee's operations, directly or indirectly, on or off of the leased premises, to persons or property, it being fully understood that the Lessor has and retains no control, supervision or authority over the Lessee's employees or other persons, and the Lessee shall and does assume all responsibility and agrees to carry...
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United States v. Swank
...from a mineral deposit at any time without cause is not really an owner of any economic interest in the deposit"); Mullins v. Commissioner, 48 T.C. 571, 583 (1967) (courts have repeatedly held that "the right to mine to exhaustion or for a specific period is the critical factor in determini......
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Bakertown Coal Company, Inc. v. United States
...from a mere contract mining operator, on terminability grounds. One of these decisions was affirmed by the Third Circuit. In Charles P. Mullins, 48 T.C. 571 (1967), the majority denied the lessee depletion under the so-called Bolling Lease, which was terminable by the lessor upon 60 days' n......
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UNITED STATES V. SWANK
...from a mineral deposit at any time without cause is not really an owner of any economic interest in the deposit"); Mullins v. Commissioner, 48 T.C. 571, 583 (1967) (courts have repeatedly held that "the right to mine to exhaustion or for a specific period is the critical factor in determini......
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...Bakertown Coal Co. v. United States, supra, 485 F.2d at 640, 202 Ct.Cl. at 855-56, where Chief Judge Drennan's dissent in Charles P. Mullins, 48 T.C. 571 (1967) is quoted with A taxpayer who has acquired by investment any interest in mineral in place and who "secures, by any form of legal r......
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