Gap Anthracite Co. v. Commissioner
| Decision Date | 29 August 1972 |
| Docket Number | Docket No. 726-68,727-68,5032-68,4407-69. |
| Citation | 31 TCM (CCH) 924,1972 TC Memo 189 |
| Parties | Gap Anthracite Co., et al. v. Commissioner. |
| Court | U.S. Tax Court |
Sheldon M. Bonovitz, Duane, Morris & Heckscher, 1617 Land Title Bldg., Philadelphia, Pa., and Ronald F. Kidd, for the petitioners in Docket Nos. 726-68, 727-68, and 4407-69. Merle A. Wolfson, Michael R. Harris, and Andrew Hourigan, Jr., for the petitioner in Docket No. 5032-68. Edward L. Newberger, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following income tax deficiencies in these consolidated cases:
______________________________________________________________________________________________
Taxable year
Docket No. Petitioner ended Deficiency
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726-68 Gap Anthracite Co. ........................ 12/31/61 $ 1,653.93
9/30/62 151,839.98
9/30/64 16,114.61
727-68 Grant Anthracite Co. ...................... 12/31/61 5,366.04
9/30/62 142,854.34
5032-68 Glen Nan Coal Co. ......................... 6/30/63 184,335.51
6/30/64 242,851.92
6/30/65 78,240.84
4407-69 Susquehanna Coal Co. ...................... 9/30/62 403,784.58
9/30/63 55,920.81
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Due to the extensive efforts of the parties, most of the issues in these cases have been settled and most of the facts relating to the disputed issues have been stipulated. The two questions remaining for our consideration are: (1) whether either, neither, or both petitioners in Docket Nos. 5032-68 and 4407-69 have an economic interest in certain coal-producing property so as to permit the taking of a deduction for depletion with respect to that property; and (2) whether the petitioners in Docket Nos. 726-68 and 4407-69 changed their method of accounting with respect to an allegedly material item without the Commissioner's consent.2
Some of the facts have been stipulated and are incorporated herein by this reference.
Glen Nan Coal Co., Inc. (hereinafter referred to as Glen Nan) is the original petitioner in Docket No. 5032-683 and had its principal place of business in Wilkes-Barre, Pennsylvania, at the time of the filing of its petition herein. At all times pertinent hereto, Glen Nan and its predecessor-in-interest, L. Biscontini & Sons (hereinafter referred to as Biscontini), a partnership, were engaged in mining coal from certain lands henceforth referred to as the Newport Lands.
For the fiscal year ended June 30, 1963, Glen Nan timely filed its Federal income tax return with the district director of internal revenue at Scranton, Pennsylvania. For the fiscal years ended June 30, 1964 and June 30, 1965, Glen Nan timely filed such returns with the district director of internal revenue at Philadelphia, Pennsylvania.
Susquehanna Coal Company (hereinafter referred to as Susquehanna), the petitioner in Docket No. 4407-69, had its principal place of business in Nanticoke, Pennsylvania, at the time of the filing of its petition herein. At all times pertinent hereto, the corporation was engaged primarily in the business of processing coal mined by Glen Nan from the Newport Lands and selling such processed coal on both the wholesale and retail markets.
For the fiscal year ended September 30, 1962, Susquehanna timely filed its Federal income tax return with the district director of internal revenue, Scranton, Pennsylvania. For the fiscal year ended September 30, 1963, it timely filed its return with the district director of internal revenue, Philadelphia, Pennsylvania.
Gap Anthracite Co. (hereinafter referred to as Gap), the petitioner in Docket No. 726-68, had its principal office at Nanticoke, Pennsylvania, at the time of the filing of its petition herein. It filed its Federal income tax return for the calendar year 1961 with the district director of internal revenue at Scranton, Pennsylvania. For the fiscal years ended September 30, 1962 and September 30, 1964, it filed its returns with the district director at Philadelphia, Pennsylvania.
Issue 1. Depletion Issue
On or before June 30, 1958, Glen Alden Corporation (hereinafter referred to as Glen Alden) was the owner of the Newport Lands.
The M.A. Hanna Company (hereinafter referred to as Hanna), a predecessor of Susquehanna, was a large coal mine operator. During the 1950's, it was pursuing a long-term policy of divesting itself of coal mining operations and limiting itself to selling coal. Some time prior to June 17, 1958, Hanna had abandoned operation of its Glen Lyon breaker, which was located near the Newport Lands.
Biscontini, at this time, was engaged in mining and stripping coal from various properties owned by Hanna and Glen Alden, including the Newport Lands. However, in 1958, stripping work was becoming scarce, mines were "playing out," and, as a result, Biscontini was running out of work. Biscontini considered purchasing the Newport Lands to remedy this situation, but felt that Glen Alden would not deal with it because of its small size and because Glen Alden considered Biscontini to be only a contractor.
C.A. Gibbons, who headed the Susquehanna Collieries Division of Hanna, and Laurence Biscontini, a partner in Biscontini, were close friends and, at some point prior to June 17, 1958, they discussed the purchase of the Newport Lands from Glen Alden in light of all of the aforementioned circumstances and the aspirations of Hanna and Biscontini.
Biscontini and Hanna subsequently entered into a series of agreements relating to the purchase of the Newport Lands and the sale of the coal produced therefrom.
Hanna also agreed to convey certain surface rights to Biscontini at the latter's request provided Biscontini built a new breaker on the property and paid Hanna a royalty of 2½ cents per ton on all coal processed at the site. The General Agreement further provided that if Biscontini defaulted upon the mortgage and Glen Alden commenced foreclosure proceedings, Biscontini would convey the Newport Lands to Hanna, subject to the mortgage, for $1.00.
The $275,000 furnished by Biscontini was made the subject of an escrow agreement, which provided that it was to be returned to Biscontini if the agreement for the acquisition of the Newport Lands from Glen Alden was not completed.
Simultaneous with the General Agreement, Hanna and Biscontini executed a supplementary agreement reciting Hanna's undertaking to convey to Biscontini the Newport Lands being acquired from Glen Alden and providing that the General Agreement be amended to provide "that Biscontini, or his assignee, shall assume to Glen Alden the obligations in the mortgage between Glen Alden and Hanna."
Also on June 17, 1958, Hanna, through its Susquehanna Collieries Division, entered into an Operating Agreement with Biscontini which was to remain in effect until August 31, 1961. Biscontini was to assume generally all costs of mining and delivering coal from the Newport Lands to Hanna's Glen Lyon breaker and was to receive a flat rate of $18 per 100-cubic-foot mine car. In addition, Biscontini agreed to reimburse Hanna on a quarterly basis for real estate taxes on the Newport Lands and to pay Hanna a minimum of $40,000 per year plus 20 cents per gross ton over 200,000 tons on all coal mined from the Newport Lands; a contemporaneous agreement provided that Hanna would apply all such payments to the Glen Alden mortgage. Hanna retained a sizeable number of controls under the Operating Agreement, including the rights to suspend work by Biscontini; to terminate the agreement on two weeks' notice for cause (that determination being at the sole discretion of Hanna); to suspend production as Hanna's business conditions required; to inspect the operation at any time in order to be sure Biscontini was complying with the terms of the agreement; to terminate the agreement on account of specified financial difficulties of Biscontini or adverse action on Biscontini's part; and to terminate the agreement if the operations proved unprofitable to Hanna. Biscontini agreed to surrender the premises to Susquehanna upon the termination of the agreement "in...
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