Costain Coal, Inc. v. U.S., 96-5133

• Decision Date: 01 October 1997
• Docket Number: No. 96-5133,96-5133
• Citation: 126 F.3d 1437
• Parties: -6726 COSTAIN COAL, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1437

126 F.3d 1437

80 A.F.T.R.2d 97-6726

COSTAIN COAL, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

No. 96-5133.

United States Court of Appeals, Federal Circuit.

Oct. 1, 1997.

Douglas P. Romaine, Stoll, Keenon & Park, LLP, Lexington, KY, argued for plaintiff-appellant. With him on the brief were Lisbeth Ann Tully and Melissa A. Stewart.

Joan I. Oppenheimer, Attorney, Tax Division, Department of Justice, Washington, DC, argued for defendant-appellee. With her on the brief were Loretta C. Argrett, Assistant Attorney General, and Kenneth L. Greene, Attorney.

Before RICH, PLAGER, and SCHALL, Circuit Judges.

SCHALL, Circuit Judge.

Costain Coal, Inc. ("Costain") appeals from the July 1, 1996 judgment of the United States Court of Federal Claims, denying Costain's motion for summary judgment and granting the government's cross-motion in Costain's suit for a refund of federal excise taxes imposed on the sale of coal pursuant to Internal Revenue Code § 4121. Costain Coal, Inc. v. United States, 36 Fed. Cl. 38 (1996). In its decision, the court calculated the amount of tax due under section 4121 by determining the price charged by a producer for a ton of coal, where "coal" did not include any excess moisture and where no part of the price stated in the contract of sale was allocated for the excess moisture. Accordingly, the court upheld the Internal Revenue Service's ("IRS") calculation of the tax due and rejected Costain's claim for a refund. We affirm.

BACKGROUND

I.

Section 4121 of the Internal Revenue Code imposes an excise tax on the sale of coal. It provides in pertinent part as follows:

(a) Tax imposed. -

(1) In general.--There is hereby imposed on coal from mines located in the United States sold by the producer, a tax equal to the rate per ton determined under subsection (b).

(2) Limitation on tax.--The amount of the tax imposed by paragraph (1) with respect to a ton of coal shall not exceed the applicable percentage (determined under subsection (b)) of the price at which such ton of coal is sold by the producer.

(b) Determination of rates and limitations on tax.--For purposes of subsection (a) -

(1) the rate of tax on coal from underground mines shall be $1.10,

(2) the rate of tax on coal from surface mines shall be $.55, and

(3) the applicable percentage shall be 4.4 percent.

26 U.S.C. § 4121 (1994).

The coal at issue in this case is from underground mines. In general, pursuant to section 4121(a)(1), a flat rate of $1.10 per ton is assessed on the sale of such coal. However, if the coal is sold by the producer for less than $25.00 per ton, subsection (a)(2) serves to limit the applicable tax to an ad valorem rate of 4.4% of the price at which the coal is sold by the producer. ¹

In 1986, the IRS published Revenue Ruling 86-96, 1986-2 C.B. 181, to carry out the recently-issued decision in A.J. Taft Coal Co. v. United States, 605 F.Supp. 366 (N.D.Ala.1984), aff'd, 760 F.2d 280 (11th Cir.1985) (table) (Taft I ). Taft I held that the term "coal," as used in section 4121, did not include water in excess of the inherent moisture content of the coal. ² In its Revenue Ruling, the IRS stated:

For purposes of the tax imposed by section 4121 of the Code, the Internal Revenue Service will follow the Taft Coal Co. [Taft I ] decision regarding the moisture content of coal. The Service will allow a calculated reduction of taxable weight of coal for the weight of excess moisture, but only where the taxpayer can demonstrate through competent evidence that there is a reasonable basis for its determination of the existence, and amount, of excess moisture.

Rev. Rul. 86-96, 1986-2 C.B. 181.

II.

Costain is the successor in interest to Pyro Mining Company ("Pyro Mining") and to Pyro Alcoa Coal Company ("Pyro Alcoa"). Pyro Mining and Pyro Alcoa entered into contracts with their customers under which they agreed to deliver coal having a specified BTU ³ content, and which did not contain moisture, ash or sulfur in excess of specified amounts. If coal meeting those requirements was delivered, the customer paid a fixed price per ton. However, if the coal delivered failed to meet those requirements, then the customer could either reject the delivery or reduce the price paid per ton according to a fixed schedule.

Pursuant to their contracts, during the taxable quarters October 1, 1985, to December 31, 1988, Pyro Mining and Pyro Alcoa ⁴ sold coal from underground mines for less than $25.00 per ton, thereby bringing into play the 4.4% ad valorem rate limitation of section 4121(a)(2). In determining the amount of excise tax due, the IRS calculated the price of a ton of coal under section 4121(a)(2) by determining the actual amount of coal being sold--that is, minus the excess moisture--and dividing the stated contract price by that amount. The IRS then calculated the tax due by multiplying the price of a ton of coal by 4.4%.

In due course, after paying the assessed taxes, Pyro Mining and Pyro Alcoa filed refund claims with the IRS, asserting that it had used an incorrect method for calculating the amount of excise taxes due. ⁵ The IRS denied the claims, and Costain--as successor in interest to the two companies--filed two tax refund suits in the Court of Federal Claims. The suits were consolidated before the court.

III.

The issue presented before the Court of Federal Claims was how to determine the "price at which such ton of coal is sold by the producer" for purposes of calculating the excise tax under 26 U.S.C. § 4121(a)(2). In order to help illustrate their respective positions, the parties joined in posing a hypothetical situation in which "a producer of underground coal sells 100 tons of 'product' for a stated contract price of $20 per ton, and ... the 'product' sold is 95 percent coal and 5 percent excess moisture." Costain, 36 Fed. Cl. at 40. Based upon this hypothetical, the parties' positions were stated as follows:

a. Plaintiff's Calculation. Applying the definition of "coal" used in the Taft Coal [Taft I ] decision, only 95 tons (95% of the 100 tons of material sold) is "coal" sold for a total price of $2,000. Since the purchaser is purchasing products consisting in this case of water which is exempt from tax and coal which is taxable at a stated price based on tonnage, the purchase price must be allocated proportionately resulting in a price per ton of ($2,000 X 95% divided by 95 tons). Pursuant to §§ 4121(a)(1) and (b)(1), for coal from underground mines, the tax is imposed at a rate is [sic] $1.10 per ton. However, §§ 4121(a)(2) and (b)(3) provide a limitation on the rate of tax imposed. The rate may not exceed 4.4% of the price at which the ton of coal is sold by the producer. Thus, the rate per ton may not exceed 4.4% of $20.00, or $0.88 per ton. Since the limitation applies, the tax is imposed at the rate of $0.88 for 95 tons of "coal" or $83.60.

b. Defendant's Calculation. Applying the definition of "coal" used in the Taft Coal [Taft I ] decision, only 95 tons (95% of the 100 tons of material sold) is taxable coal sold for a total price of $2,000. The other 5 tons of material is excess moisture that is not "coal" and is therefore not subject to the tax. Since $2,000 has been paid for 95 tons of taxable coal, the effective price is $21.05 per ton of taxable coal. Pursuant to §§ 4121(a)(1) and (b)(1), for coal from underground mines, the tax is imposed at a rate of $1.10 per ton. However, §§ 4121(a)(2) and (b)(3) provide a limitation on the rate of tax imposed. The rate may not exceed 4.4% of the price at which the ton of coal is sold by the producer. Thus, the rate per ton may not exceed 4.4% of $21.05 or $0.93 per ton. Since the limitation applies, the tax imposed on this sale is limited to the rate of $0.93 for 95 tons of taxable coal, or $88.35.

See id. at 40-41.

In the Court of Federal Claims, Costain argued that the excise taxes paid by Pyro Mining and Pyro Alcoa should have been computed based upon the first methodology above. The IRS had used the second methodology, which resulted in higher taxes. Costain sought to recover the differences between the taxes paid under the IRS's methodology and the taxes that would have been paid under Costain's methodology.

On cross-motions for summary judgment, the Court of Federal Claims determined that the government's approach correctly determined the "price at which such ton of coal is sold by the producer" under section 4121. Id. at 43. The court rejected Costain's contention that the term "price," as used in section 4121(a)(2), referred to the stated contract price for a ton of coal containing an acceptable amount of excess moisture. Id. at 41-42. The court concluded that Costain's approach yielded the implausible result that "the producer in the example given above sells 95 tons of coal for $20 per ton and 5 tons of excess moisture for $20 per ton and thus, coal and water are equal in value to the purchaser." Costain, 36 Fed. Cl. at 42. While excess moisture may be present in " Coal" means "coal" and it is not an ambiguous term.... [The producer] was never paid for excess water contained in the coal it sold to its customer, Alabama Power, because Alabama Power paid only for the coal it purchased, reducing the price it paid to account for the water.

coal, stated the court, customers pay only for the coal and not for the excess moisture. Id. In that regard, the court noted a passage from A.J. Taft Coal, Inc. v. Connors, 906 F.2d 539 (11th Cir.1990) (Taft II ), where the Eleventh Circuit stated:

Consequently, Alabama Power did not purchase a "coal product" consisting of coal and excess moisture; it purchased coal alone. [The producer] threw in the water for free.

Costain, 36 Fed. Cl. at 42 (quoting Taft II, 906 F.2d at 544). The Court of Federal Claims further noted that, in the case before it, there was no evidence that a different approach was followed. Costain, 36 Fed. Cl. at 42. The court stated:

In sum, all of [Costain's...