Guthrie v. United States
| Decision Date | 25 September 1963 |
| Docket Number | No. 15126.,15126. |
| Citation | 323 F.2d 142 |
| Parties | Clyde GUTHRIE and Edith D. Guthrie, et al., Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Michael A. Mulroney, Atty., Dept. of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, Attys., Dept. of Justice, Washington, D. C., on the brief, William E. Scent, U. S. Atty., Louisville, Ky., for appellant.
Robert S. Dorsey and Chas. I. Dawson, Louisville, Ky. (Bullitt, Dawson & Tarrant, Louisville, Ky., of counsel), for appellees.
Before WEICK and O'SULLIVAN, Circuit Judges, and PRETTYMAN, Senior Circuit Judge.
O'SULLIVAN, Circuit Judge.
This is an appeal by the United States from a judgment of the District Court for the Western District of Kentucky ordering the United States to refund $39,619.47 worth of taxes plus interest at 6% per annum from October 31, 1958, to the several taxpayers Guthrie here involved. The issue presented is whether the taxpayers were entitled to treat proceeds obtained from business interruption insurance as "gross income from mining" for percentage depletion purposes under Section 114(b) (4) of the Internal Revenue Code of 1939 and Section 613(b) (4) of the Internal Revenue Code of 1954.
Taxpayers are partners (or personal representatives of partners) in the Harlan Fuel Company, a partnership engaged in the mining, processing, and selling of coal. On January 7, 1953, the tipple, screening facilities, and a portion of the conveyor system belonging to the partnership were destroyed by fire. Prior to this fire, this equipment had enabled the partnership to process 27 different grades of commercially marketable coal. Because of the fire, the mine lay idle for nine days, after which the partnership constructed a temporary tipple. At about the same time, construction was begun on a new permanent tipple. By using the temporary tipple, the partnership resumed processing and selling coal about a month after the fire. This temporary equipment permitted the grading of only five types of marketable coal. During the twelve months preceding the date of the fire, 274,000 tons of coal were mined and processed by the partnership. This coal was sold for $1,561,409. During the twelve months following the fire, 288,500 tons of coal were mined and processed. This coal was sold for $1,496,415.
The temporary tipple, vibrator screens, and conveyors were destroyed by a second fire which occurred on September 4, 1954. As a result of this second fire, the mine was shut down for 28 days. In the twelve month period preceding the date of this fire, the partnership mined, processed, and sold 191,800 tons of coal for $1,104,949. During the twelve months following the fire, 183,800 tons of coal were mined, processed, and sold for $970,148.
During the year preceding the first fire, the partnership made a profit of $160,000. The year following the first fire, its profit was $41,000. In the year prior to the second fire, the partnership profit was $32,600. During the year following the second fire, no profit was made, but a loss of $100,800 was sustained.
During the years in question, the partnership was insured by various companies against losses resulting from "business interruptions" caused by certain hazards, including fire. These policies were identical, and, in substance, each provided that the partnership should be compensated up to $10,000.00 on the net profit it would have earned but for the damage and consequent interruption of business.1 Under these policies, the partnership received $225,969.29 after the first fire, and $175,728.36 after the second fire. These amounts were settled upon by the insurance company adjuster and the partnership "by giving due consideration to the experience of the business before the loss and the probable experience thereafter, had no such loss occurred." Of the total proceeds received by it from such insurance, the partnership treated $121,244.36 as representing non-production expenditure and the balance, $280,453.29 as income subject to depletion allowance. Such balance was allocated in varying amounts over the partnership's fiscal years, 1953, 1954 and 1955. The Commissioner of Internal Revenue determined that such proceeds were not income subject to depletion allowance and assessed deficiencies against the partners equal to the deductions taken therefor in the several years involved. These assessments were paid over protest and the instant refund suits were brought.
The Sections of the Internal Revenue Codes of 1939 and 1954 applicable to the matter before us are of such like import that it will suffice here to quote only from the 1954 code. It provides, in pertinent part, as follows:
By this statute, Congress has recognized that mineral deposits are wasting capital assets. Commissioner of Internal Revenue v. I. A. O'Shaugnessy, Inc., 124 F.2d 33, 36 (C.A. 10, 1941); Parsons v. Smith, 359 U.S. 215, 220, 79 S.Ct. 656, 3 L.Ed.2d 747. The deduction for depletion of natural resources is predicated on the theory that capital consumed in the production of gross income ought to be returned tax free. Anderson v. Helvering, 310 U.S. 404, 408, 60 S.Ct. 952, 954, 84 L.Ed. 1277, 1280. The depletion allowance in the case of coal here is granted as compensation for the exhaustion of the mineral deposit through its severance and sale. Helvering v. Mountain Producers Corp., 303 U.S. 376, 381, 82 L.Ed. 907, 911; Douglas v. Commissioner of Internal Revenue, 322 U.S. 275, 281, 64 S.Ct. 988, 992, 88 L.Ed. 1271, 1277. "Depletion * * * is an allowance for the exhaustion of capital assets," United States v. Cannelton Sewer Pipe Co., 364 U.S. 76, 86, 80 S.Ct. 1581, 1586-1587, 4 L.Ed.2d 1581. Percentage depletion is based upon a fixed percentage of the income realized during the tax year from the severance of minerals from a piece of property. Dragon Cement Company v. United States, 244 F.2d 513, 514 (C.A. 1, 1957), cert. denied, 355 U.S. 833, 78 S.Ct. 50, 2 L.Ed. 2d 45. The fixing of the 10 percent depletion allowance in the case of coal and the varying percentages applicable to other minerals represents a Congressional effort to approximate general fairness in treating income from wasting assets. The determination of such respective percentages was no doubt the product of practical and scientific consideration of what percentage of the gross proceeds of the severed minerals might fairly be allocated as compensation for the exhaustion of their unsevered and capital worth. Impossibility of arriving at formulae that would be demonstrably accurate in all cases resulted in adoption of figures which, though in a measure arbitrary, had bases in considered judgment. United States...
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