Logan Coal & Timber Ass'n v. Helvering

• Decision Date: 24 September 1941
• Docket Number: No. 7642.,7642.
• Citation: Logan Coal & Timber Ass'n v. Helvering, 122 F.2d 848 (3rd Cir. 1941)
• Parties: LOGAN COAL & TIMBER ASS'N v. HELVERING, Com'r of Internal Revenue.
• Court: U.S. Court of Appeals — Third Circuit

122 F.2d 848 (1941)

LOGAN COAL & TIMBER ASS'N v. HELVERING, Com'r of Internal Revenue.

No. 7642.

Circuit Court of Appeals, Third Circuit.

September 24, 1941.

Charles S. Jacobs and E. Spencer Miller, both of Philadelphia, Pa. (William R. Spofford, of Philadelphia, Pa., and Ballard, Spahr, Andrews & Ingersoll, of Philadelphia, Pa., on the brief), for petitioner.

A. F. Prescott, Sp. Asst. to Atty. Gen. (Samuel O Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before BIGGS, MARIS, and JONES, Circuit Judges.

MARIS, Circuit Judge.

This case raises the question whether the income of the taxpayer for the years 1934, 1935, 1936 and 1937, upon which the Commissioner seeks to impose a surtax as undistributed income of a personal holding company, constituted rents or mineral royalties. If it constituted rents it was not subject to the surtax by virtue of the express provisions of Section 351 of the Revenue Act of 1934, 26 U.S.C.A.Int.Rev. Acts, page 757, and Sections 351, 352 and 353 of the Revenue Act of 1936, as amended by the Revenue Act of 1937, 26 U.S.C.A. Int.Rev. Acts, pages 936, 938, 939, since it comprised more than 50% of the taxpayer's gross income for each of the years in question. If on the other hand it constituted mineral royalties it was subject to the surtax under the language of both acts, the taxpayer's deductions under Section 353(h) not constituting 15% of its gross income. The Board of Tax Appeals held the income to be mineral royalties and therefore taxable. The taxpayer thereupon brought the case here for review.

The facts are fully set out in the findings and opinion of the Board (42 B.T.A. 529) and need not be detailed here. Suffice it to say that the income in question constituted monthly payments made to the taxpayer by the lessees of its coal lands, which payments, in accordance with the terms of the leases, were computed on a tonnage basis for the coal mined during the preceding month. While the leases provided for certain minimum annual royalties all payments in excess of the amounts due for coal actually mined might be applied to coal mined in subsequent years. The leases contained the usual provisions authorizing the lessees to mine coal, to manufacture coke and other products of coal, and to conduct a general mercantile business on the leased land, with the privilege of using the surface of the land and so much of the timber, stone, sand, clay and water found thereon as might be necessary in connection with the operations contemplated by the leases. The lessees were also given the right to transport through and under the leased land coal of the lessees mined on adjacent properties. The lessees carried on coal mining operations on the leased lands as contemplated and in connection therewith also transported through the leased lands coal from adjoining mines.

We think that the Board of Tax Appeals was right in holding the income in question to be mineral royalties rather than rents. While the word "rent" is often used, as it was in the leases here involved, in a sense broad enough to include such payments, it must be remembered that we are here dealing with a statutory provision which differentiates rents from royalties. We must, therefore, look for the distinction which Congress intended to make between the two words. That distinction is, we think, the commonly accepted one that rent is a compensation for the right to use property which is fixed and certain in amount and payable periodically over a fixed period regardless of the extent of the use of the property,¹ while royalty is a compensation for the use of property which is based as to amount entirely upon the use actually made of the property.² As applied to coal mining property the difference between leases providing for the two types of compensation was well stated in Vandalia Coal Co. v. Underwood, 60 Ind.App. 675, 111 N.E. 329, 330, as follows: "The coal industry, however, seems to recognize two general classes of mining leases: First, the lease which requires the lessee to pay the lessor a certain amount of money at stated intervals as a `dead rent,' irrespective of the productiveness of the mine; second, the payment of royalty on the quantity of mineral mined, with the requirement that a stipulated amount be mined within a stated period of time, or, upon failure to do so, to pay a certain amount of money equal to the income that would have been received by the landowner had the mineral been mined." See also Raynolds v. Hanna, 6 Cir., 55 F. 783, at page 800, in which Circuit Judge Jackson said that "`royalty' * * * is perhaps the most appropriate word...