Island Creek Coal Co. v. Comm'r of Internal Revenue
| Decision Date | 27 November 1964 |
| Docket Number | Docket No. 91431. |
| Citation | 43 T.C. 234 |
| Parties | ISLAND CREEK COAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frederic A. MacDonald, for the petitioner.
John J. Larkin, for the respondent.
Premiums paid by taxpayer for business interruption fire insurance must be deducted from taxpayer's gross income from mining in computing petitioner's taxable income from the property for percentage depletion purposes.
Respondent determined deficiencies in petitioner's income tax for the taxable years 1957 and 1958 in the respective amounts of $406,785.44 and $260,792.69.
The parties have agreed as to the disposition of all issues raised in the pleadings except for one.
The sole issue remaining for decision is whether petitioner, engaged in the business of mining coal, must deduct the amounts of $76,840 and $53,086, representing premiums paid for business interruption fire insurance coverage in the respective years 1957 and 1958, in determining its taxable income from its property to compute the allowable deductions for percentage depletion under section 613 of the Internal Revenue Code of 1954.
The facts have been stipulated and are found accordingly.
Petitioner is a Maine corporation with its principal office in Huntington, W. Va. It filed its Federal income tax return for the calendar year 1957 with the district director of internal revenue, Boston, Mass., and it filed its Federal income tax return for the calendar year 1958 with the district director of internal revenue, Parkersburg, W. Va.
During the years in issue petitioner owned and operated a number of bituminous coal mines in West Virginia, Virginia, and Kentucky. These mines consisted of underground mine workings and other mining facilities, including a structure on the surface for screening and cleaning the coal and for loading the coal into railroad cars for shipment. These structures are known in the industry as preparation plants.
On June 1, 1956, petitioner acquired business interruption fire insurance covering its preparation plants. This coverage was in the form of identical endorsements on a number of blanket fire insurance policies issued by various fire insurance companies. One endorsement, similar in form and substance to the others issued by the participating insurance companies, provided as follows:
1. Subject to all its provisions and stipulations, this policy covers only the use and occupancy of the property occupied by the Insured as Coal Mining Property (formerly owned by the Red Jacket Coal Corporation) and situate in Mingo and Wyoming Counties, West Virginia, and Buchanan County, Virginia.
2. If the building(s), structure(s), machinery, equipment or merchandise on the premises described (for stock see Sections 7, 8 and 9 and for commissary merchandise, see paragraph C of Section 11 of this form) be damaged or destroyed by the peril(s) insured against during the term of this policy and a necessary interruption of business directly results, this Company shall be liable for not exceeding the ACTUAL LOSS SUSTAINED by the Insured, for only such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair or replace such described property as has been damaged or destroyed, commencing with the date of such damage or destruction and not limited by the date of expiration of this policy, to wit:—
ITEM I. $333,570 On the net profit which is thereby prevented from being earned and such charges and other expenses, including vacation pay under contract and payroll expense of Group I employees, but excluding payroll expense of Group II employees, as must necessarily continue during the interruption of business, to the extent only that such charges and expenses would have been earned had no loss occurred.
This Item covers expense of necessary heat, light and power, the cost of which is prevented from being earned during the interruption of business.
Definition of Group I employees: Officers, executives, superintendents, foremen, engineers, chief electricians, office employees, employees required during an interruption of business for necessary ventilation, drainage and maintenance above or below ground.
6. EXPENSE TO REDUCE LOSS: This policy also covers such expenses as are necessarily incurred for the purpose of reducing any loss under this policy (except expense incurred to extinguish a fire), not exceeding, however, the amount by which the loss under this policy is thereby reduced. Such expenses shall not be subject to the application of the Contribution Clause.
The premiums paid by petitioner for the business interruption fire insurance amounted to $76,840 in 1957 and $53,086 in 1958.
On June 18, 1957, a fire occurred at petitioner's mines Nos. 9 and 12, resulting in damage to the preparation plants at these mines. There was a total loss of production at mine No. 9 for 23 working days and at mine No. 12 for 8 working days, and there was a partial loss of production at mine No. 9 for 24 working days. Upon resumption of full production at mine No. 9 after 47 working days, the coal mined and prepared at that mine was substantially the same as it had been prior to the fire. However, although full production at mine No. 12 was resumed after 8 working days, petitioner lacked adequate cleaning facilities to prepare the coal produced at this mine, and there was a consequent loss of realization on the coal produced at this mine due to the fact that petitioner could not obtain the same price for its coal produced at this mine over temporary facilities after the fire equal to the selling price which it could have realized if the fire had not damaged the preparation plant. Also, petitioner incurred expenses in constructing temporary facilities in order to minimize its losses due to the fire.
The business interruption insurance coverage extended to these items, and after investigation by an insurance adjuster, the insurer (insurers) made payments to petitioner under the business interruption insurance aggregating $332,229.76 because of the losses due to the fire damage to the preparation plants.
The amount of $332,229.76 was comprised of the following:
(1) $62,548.62 representing loss of production at the two mines.
(2) $240,664.40, representing loss of realization on the production at mine No. 12, computed at $0.688 per ton on a production of 116,767 tons prior to November 1, 1957, plus $0.85 per ton on a production of 188,622 tons after November 1, 1957.
(3) $29,016.74, representing the additional expense incurred to construct temporary facilities to reduce the losses.
The amount received for loss of realization from the sale of coal produced at mine No. 12, in the amount of $240,664.40, was allocated approximately $126,144 to 1957 and $114,520 to 1958. In computing its deduction for percentage depletion in its returns for 1957 and 1958, petitioner included the amounts of $126,144 for 1957 and $114,520 for 1958 in gross income from mining, and it deducted the premiums paid in these years for business interruption insurance as expenses attributable to the mineral property1 in arriving at taxable income.
Respondent determined that the foregoing amounts of insurance proceeds did not constitute gross income from mining for purposes of computing the deductions for percentage depletion. This determination was assigned as error by petitioner in its original petition. Petitioner now concedes, however, on the authority of Guthrie v. United States, 323 F.2d 142 (C.A. 6, 1963), that such insurance proceeds are not to be included in gross income from mining for purposes of computing the deductions for percentage depletion, but petitioner, by amendment to its petition, now contends that the premiums paid for the business interruption insurance, while properly deductible as general expenses, should not be deducted from gross income from mining in determining the ‘taxable income from the property’ for purposes of computing allowable depletion.2
Under the provisions of sections 611 and 613, I.R.C. 1954,3 the material provisions of which are set forth in the margin, petitioner, operating coal mines during the taxable years 1957 and 1958, is entitled to deductions for percentage depletion for these years equal to 10 percent of its ‘gross income from the property,‘ but limited to 50 percent of its ‘taxable income from the property.’ ‘Gross income from the property’ is defined in the statute as ‘gross income from mining’; but ‘taxable income from the property’ is not defined in the statute.
The present controversy is concerned with the computation of petitioner's ‘taxable income from the property’ in each of the years 1957 and 1958 in order to arrive at the amounts of the percentage depletion deductions allowable. Specifically, the issue is whether petitioner must deduct the amounts it paid in the years 1957 and 1958 as premiums for business interruption fire insurance in computing its ‘taxable income from the property’ in each of these taxable years in applying the 50-percent limitation.4
As noted above, the term ‘taxable income from the property’ is not defined statutorily. That the term was intended to mean the same as the term ‘net income from the property,‘ as used in section 114(b) of the 1939 Code, is clear from the report of the Committee on Ways and Means with regard to the enactment of section 613, I.R.C. 1954, wherein it is stated:
As used in section 613, the term ‘taxable income from the property’ means the same as ‘net income from the property’ in existing section 114(b)(3), (4)(A), and no substantive change is intended by the change in language. In computing taxable income from the property it is intended that there be taken into account all deductible items (other than depletion) including such items as administrative and financial overhead expenditures and taxes which, under sound accounting principles, are...
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