Douglas Coal Co. v. United States, Civ. A. No. 73-69-E
| Decision Date | 17 March 1977 |
| Docket Number | Civ. A. No. 73-69-E,74-134-E. |
| Citation | 429 F. Supp. 322 |
| Parties | DOUGLAS COAL COMPANY, a corporation, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of West Virginia |
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Richard G. Herndon, R. Clark Morton and Judith A. Herndon, Wheeling, W. Va., for plaintiff.
Stephen G. Jory, U. S. Atty., Elkins, W. Va., for defendant.
Cross motions for summary judgment are pending in these consolidated actions. The parties agreed to the consolidation, which was effected by order, entered November 25, 1974.
Both actions, brought under 28 U.S.C. § 1346(a)(1), are against the United States to recover corporate income taxes which the Commissioner of Internal Revenue (the "Commissioner") assessed to and collected from Douglas Coal Company ("Douglas"), the Plaintiff in both cases. Civil Action No. 73-69-E relates to calendar years 1967 and 1968 and Civil Action No. 74-134-E relates to calendar year 1969.
Three questions, all relating to the internal revenue laws, are presented:
1. Whether Plaintiff Douglas, which strip-mined coal on two tracts of land under agreement and lease from the Virginia Electric and Power Company ("Vepco"), possessed an "economic interest" in the coal in place in those two tracts which would entitle it to depletion deductions for calendar years 1967, 1968 and 1969.
2. Whether legal fees paid by Douglas in the amounts of $5,000.00 in 1967 and $3,600.00 in 1968 are capital expenditures relating to the acquisition of coal property and therefore not deductible as ordinary expenses.
3. Whether Douglas properly aggregated its Vindex, Maryland, deep mining operation with the balance of its operating mineral (coal) properties for purposes of computing depletion deductions for 1967 and 1968.1
After the joinder of issue and the consolidation, Douglas moved for summary judgment on the three issues enumerated above, "relying upon the pleadings, the exhibits attached thereto, the responses to interrogatories of both parties and the exhibits attached thereto." (Plf.'s Motion, p. 4.) The Government then cross-moved for partial summary judgment, "stating that based upon the undisputed facts of this case, coupled with the pertinent written documents heretofore filed with the Court, it is entitled to judgment . . . as a matter of law." (Gov't's Motion for Partial Summary Judgment, par. 2.) However, in its second brief (page 9), the Government takes the position that issue 3, above, relating to the aggregation of separate mining operations, "is presently not susceptible of summary judgment treatment" because "none of the critical facts are properly advanced by plaintiff."2
The following matters, unless otherwise indicated, are not in dispute:
1. Douglas, the Plaintiff, is a West Virginia corporation with offices in Elkins, West Virginia. Douglas markets coal which it removes by strip mining. In addition, Douglas has deep mine interests and also markets coal which is deep mined. (1973 Compl., pars. 2, 8(b)).3
2. As early as 1964 Douglas contracted to deliver and began to deliver substantial quantities of coal to Vepco at its coal-fired electric generating plant near Mt. Storm in Grant County, West Virginia. Douglas mined this coal on lands which it leased from the Western Maryland Railway Company. (Joseph D. Ristroph Aff't, April 28, 1970, par. 3; see Apr. 11, 1967, and October 1, 1967, agreements between Vepco and Douglas).
3. Later, in the three relevant years, 1967 through 1969, Douglas strip mined coal which it leased from Vepco on two tracts, known as the Herr and Cavitt tracts, in Grant and Tucker counties, West Virginia. Much of the coal from this mining operation was supplied to Vepco at its Mt. Storm power plant. At the same time, Douglas sold coal to Vepco which Douglas mined on other lands. Douglas' operations also included strip mining on coal lands which it leased from the Western Maryland Railroad and which adjoined the Herr and Cavitt tracts. .
4. Douglas' right to strip mine on the Herr and Cavitt tracts in the relevant period, 1967-1969, arose out of three agreements: (i) a "Coal Mining And Delivery Contract" between Douglas and Vepco, dated April 11, 1967, and amended July 1, 1967; (ii) a "Contract and Lease" between Douglas and Vepco, dated October 1, 1967; and (iii) an agreement, dated March 28, 1967, between Douglas and Lee Jackson Shockey, Jo Ann Shockey and Sonja Jean Shockey (hereinafter the "Shockey lease"). These instruments, which are attached to Douglas' interrogatory answers, are summarized in paragraphs 5 through 7, which follow.
5. The April 11, 1967, Coal Mining And Delivery Contract and the July 1, 1967 Amendment.
(a) In the April 11, 1967, contract, Vepco granted to Douglas the right to strip mine "all the coal physically and economically feasible" in designated areas on the Herr and Cavitt tracts. Douglas agreed "to deliver the coal mined" to Vepco at the rate of at least 120,000 tons per year. (Art. 1.1.) However, all coal which Douglas shipped to Vepco had to meet certain "quality restrictions and limitations." The inert matter, ash, moisture and sulphur content could not exceed certain levels. There were specifications as to size, and the softening temperature of the ash could not be less than the specified level. Finally, the heat value could not be lower than 11,500 B.T.U.'s per pound unless Vepco agreed "to accept coal of lower heat value." However, "no coal could be shipped which had a heat value of less than 10,500 BTU/lb." (Art. 2.1.) Indeed, as a further precaution, the contract specifically provided that Vepco would make "no payment . . . for any rail car . . . of coal . . . found to have a BTU content below 10,500 BTU per lb." (Art. 5.3).
(b) The contract contained a graduated price table which was geared to B.T.U. content: the higher the B.T.U., the higher the price. The price was "F.O.B. rail car at the Douglas' Tipple." Douglas agreed to "pay all of the costs associated with the mining and delivery of the coal to" rail cars at its tipple. (Art. 5.1).
(c) The price schedule was to "be firm for the term of the contract." However, if Douglas' operation "changed from a nonunion to a union basis" the contract could be "reopened for price adjustment to reflect the increased cost" of a union operation. (Art. 5.2).
(d) Douglas agreed not to co-mingle coal mined from the Herr and Cavitt tracts with coal mined from other properties (Art. 6.1).5
(e) It appears from the contract as a whole that Douglas was entirely in charge of the planning (including engineering) and operation of the Herr/Cavitt stripping enterprise. (See, e. g., Art. 8.1; and Art. 7.1 which provides that "the equipment and techniques employed by Douglas . . . and all other aspects of the mining and delivery of the coal shall be the sole responsibility of Douglas.") However, Douglas could use no techniques which "would impair or destroy the economic potential of deep mining" on the Herr and Cavitt tracts. (Art. 7.1).
(f) Douglas was obligated to obtain surface rights to the Cavitt tract "to allow and enable the strip mining of the coal." In addition, Douglas was required to secure a release from the surface owners which relieved Vepco from liability as a result of the mining. (Art. 11.1).
(g) Douglas assumed all risks of the mining operation and specifically agreed to "hold Vepco harmless" from any liability and damages resulting from the mining. In particular, Douglas was to carry liability insurance "to the limits required by Vepco." (Arts. 9.1, 10.1).
(h) Douglas agreed "to comply and be solely responsible for such compliance with all applicable rules and regulations of regulatory authorities having jurisdiction" over the mining operation. Specifically, Douglas agreed to do all backfilling and reclamation work and agreed that such work, when done, would "fully comply with the requirements at that time in effect in the State of West Virginia." (Arts. 7.2, 7.3).
(i) Douglas agreed to "pay . . . any property tax or severance tax levied on the coal whether billed to Vepco or to Douglas." (Art. 5.1).
(j) The contract was for one year with a year-to-year renewal clause limited to four renewals. (Art. 13.1).
(k) The April 11, 1967, contract was amended on July 1, 1967. The amendment related solely to price and resulted in a price increase to Douglas if the minimum monthly tonnage was delivered and its "weighted average heat value was 11,500 BTU per pound or greater."
6. The October 1, 1967, Contract and Lease. The Herr and Cavitt tracts were the subject of a later (October 1, 1967) "Contract and Lease" between Douglas and Vepco which expressly "cancelled and superseded" the Coal Mining and Delivery Contract of April 11, 1967. (Art. 17.1). Many of the provisions of the new lease were lifted verbatim from the "contract" it replaced: The quality restrictions, including B.T.U. requirements, on coal supplied to Vepco were the same; Vepco did not have to pay for any car of coal "found to have a heat value below 10,500 BTU/Ib." Douglas' obligations as to reclamation, taxes, the acquisition of surface rights and general responsibility (and liability) for the mining operation continued; and the price table was identical to that in the July 1, 1967, amendment to the earlier contract.
Certain new provisions emerged in the October 1, 1967, contract and lease:
(a) Under the October 1967 instrument, Vepco "leased . . . unto Douglas all coal economically recoverable by the strip mining method on the Herr and Cavitt Tracts . . . in the areas identified." It appears that the mining area was enlarged from the earlier contract. "Additional areas could be added at a later date by mutual consent of both parties." (Art. 1.1).
(b) The...
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