Industrial Aggregate Company v. United States

• Decision Date: 29 November 1960
• Docket Number: No. 16346.,16346.
• Citation: 284 F.2d 639
• Parties: INDUSTRIAL AGGREGATE COMPANY, a corporation, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

284 F.2d 639 (1960)

INDUSTRIAL AGGREGATE COMPANY, a corporation, Appellant, v. UNITED STATES of America, Appellee.

No. 16346.

United States Court of Appeals Eighth Circuit.

November 29, 1960.

Hayner N. Larson, Minneapolis, Minn., for appellant; and Jack D. Gage, Minneapolis, Minn., on the brief.

C. Guy Tadlock, Atty., Dept. of Justice, Washington, D. C., for appellee; and Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, and Fred Youngman, Attys., Dept. of Justice, Washington, D. C., and Fallon Kelly, U. S. Dist. Atty., St. Paul, Minn., on the brief.

Before SANBORN, WOODROUGH and BLACKMUN, Circuit Judges.

BLACKMUN, Circuit Judge.

This corporate taxpayer, Industrial Aggregate Company, has sued to recover a portion of the federal excess profits tax it paid for the calendar year 1951. The trial court dismissed the taxpayer's complaint and this appeal followed.¹

Whether the taxpayer is entitled to prevail depends upon the tax treatment to be afforded to items aggregating $102,110.07 paid by it in 1952. If, in the determination of the taxpayer's net income for that year, these items are deductible as expenses under § 23(a) (1) (A), as amended, of the Internal Revenue Code of 1939, 26 U.S.C.A.,² that deduction results in an unused excess profits credit for 1952. This credit is then carried back to 1951 and applied in redetermining the taxpayer's 1951 adjusted excess profits net income with consequent lowering of the excess profits tax payable by it for that year. § 430 et seq., as amended, of the 1939 Code, as added by the Excess Profits Tax Act of 1950, 26 U.S.C.A. The difference in tax is the amount now in controversy.

The taxpayer's position is that the items qualify as such deductions. The government's position is that they do not and that the items, although recoverable over the life of the extended leases herein described (see, for example, Main & McKinney Bldg. Co. v. Commissioner, 5 Cir., 113 F.2d 81, certiorari denied 311 U.S. 688, 61 S.Ct. 66, 85 L.Ed. 444), are specifically nondeductible under § 24(a) (2) of the 1939 Code, 26 U.S.C.A.,³ and under Section 39.24(a)-2⁴ of Regulations 118 applicable to the taxable year 1952.

There is little dispute about the facts. The taxpayer since 1936 has been in the business of removing sand, gravel and other materials from land in an industrial area in the City of Minneapolis. It files its income tax returns on the accrual method of accounting and its taxable year is the calendar year. The land in question has been owned, since prior to 1951, by Oakland Heights Company, a corporation. The taxpayer is assignee of the rights of prior lessees of that land under four separate leases dated September 28, 1911, July 1, 1918, March 17, 1921, and December 31, 1929, as amended, and called Leases Nos. 1, 2, 3 and 4, respectively. The lessor in the first three of these leases was Chute Brothers Company. Oakland acquired the Chute interests in these leases; it is itself the lessor in the 1929 lease.

Each of the four leases provides for the removal of sand and gravel by the lessee and had a December 31, 1951, termination date. Each contains the following paragraph:

"If at the end of this lease, viz., December 31, 1951, the lessee having complied in full with its part of this agreement according to its true and fair intent and spirit, there shall remain unremoved from any of the said property sufficient of said sand, gravel or boulders to make it commercially practicable to continue the operation of the property for the purposes herein specified the lessee shall be allowed such reasonable additional time, not exceeding ten years, as may be fairly necessary in which to complete the removal of said materials, the same to be done in the manner and in full accordance with the intent and spirit of this instrument as designated for the period ending December 31st, 1951; — provided, however, that the lessee give to the lessor written notice of the requirement of such additional time at least one year previous to December 31st, 1951."

Lease No. 4 also provides:

"In case of default on the part of the lessee in full compliance with any of its covenants or agreements under this lease or under the said Leases Nos. 1, 2 or 3, respectively, the lessor may terminate this lease by giving the lessee at least sixty (60) days written notice of its intention so to do; and unless within such sixty (60) days the defaults specified in such notice are removed by the lessee, then from and after the expiration of said sixty (60) days all right, title, and interest on the part of the lessee under this lease and in and to said premises and every part thereof shall thereby cease and terminate, and the premises shall thereupon be surrendered to the lessor."

A similar provision is in each of the three earlier leases but is restricted in its application to defaults under the particular lease.

The first three leases have operating provisions requiring the lessee (a) diligently, as justified by the market, to remove and sell merchantable materials found on the premises; (b) to place all stripping in compact and convenient form upon the land and classified according to kind; and (c) to remove materials from the premises in as compact form as conditions permit and in such reasonable order of priority as the lessor designates. Lease No. 4 contains similar provisions; these are somewhat more specific, however, and provide, among other things, that the lessee plan and conduct its operations so as to leave the premises "in as usable and level condition as practicable." By the leases the taxpayer is obligated to pay royalties (with a minimum specified) and, apparently, the taxes and assessments upon the land.

As 1951 approached, Oakland and the taxpayer attempted to invoke the respective termination and extension provisions of the four leases:

1. On May 27, 1948, Oakland sent a letter to the taxpayer.⁵ This letter disclosed that the parties had had prior discussions regarding the taxpayer's compliance with the operating provisions of the leases. It stated that whether there had been full compliance might not be fully apparent until the leases expired at the end of 1951 and Oakland definitely asserted that the taxpayer did not then, viz., at the time the letter was written, have the right to extend the leases. It suggested the making of a new agreement between the parties which would include the amendment of the leases to extend their term for twenty years, to adjust the royalty payments upward, and to effect other changes. The letter concluded with the following: "We desire equally to settle now once and for all differences of opinion as to contract interpretations that have existed between you and us in the past, and to obviate so far as possible any disagreements in the future."⁶ Another letter, dated June 24, 1948, passed from Oakland to the taxpayer but is not in the record. On July 9, 1948, the taxpayer replied to these two letters. It stated that the suggested changes in the leases were unacceptable, that "We will not be coerced into these concessions by the threat of your refusal to agree to an extension of the gravel leases", and that the lessee's obligations thereunder had been fully performed.

On October 29, 1951, Oakland sent the taxpayer a notice of intention to terminate and cancel all four leases upon the expiration of sixty days or, in effect, at the end of 1951 unless specified defaults were removed within that time. The defaults asserted concerned the operating provisions of the leases. Specifically alleged were the covering of "great quantities of merchantable sand and gravel", the throwing of "stripping in great uneven piles", the creation of "an enormous mound of tailings" on top of merchantable material, the failure to leave the premises in a usable and level condition, the commission of waste, and the failure to comply with the "true and fair intent and spirit" of the leases. On December 26, 1951, Oakland's attorneys wrote the taxpayer's attorneys suggesting a new lease of the premises and additional acreage to begin January 1, 1952, and to provide for a ten year term, the release of claims, a higher level of royalties, and other details.

2. Meanwhile, on December 14, 1950, the taxpayer gave Oakland the year's written notice, required under all four leases, that on December 31, 1951, the circumstances would be such that the taxpayer will be entitled to and will require additional time after that date to continue its operations. The effect of the notice, if valid, was to extend the taxpayer's right of occupancy until December 31, 1961, or such earlier date as the removal of materials was completed.

On December 29, 1951, Oakland gave the taxpayer a notice of termination and demanded possession of the premises. Simultaneously the taxpayer was served with a summons and complaint in an action brought against it by Oakland in state court. By its complaint Oakland alleged defaults in the operating provisions of the leases, the commission of waste, and the consequent downgrading of the market value of the leased premises, and demanded judgment (a) of forfeiture of the estate and taxpayer's eviction from the property, (b) for rent due December 31, 1951, (c) for treble damages, amounting to $490,050.00, for waste under Minnesota Statutes, § 561.17, M.S.A., and (d) for other relief "including damages for trespass". The taxpayer in its answer denied the alleged defaults, claimed that in any event Oakland had waived them, and asserted two counterclaims upon which it requested equitable relief against forfeiture and a declaratory judgment that the leases had been duly extended.

This state court litigation did not come to trial. It was settled on December 15, 1952, upon a stipulation reciting that the taxpayer paid Oakland $75,000 "in full payment and discharge of all damages claimed or suffered by" Oakland "provided, however, that" this was not to be "construed as an...