ISLAND CREEK COAL COMPANY v. CIR

• Decision Date: 21 August 1967
• Docket Number: No. 10028.,10028.
• Citation: 382 F.2d 35
• Parties: ISLAND CREEK COAL COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

382 F.2d 35 (1967)

ISLAND CREEK COAL COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 10028.

United States Court of Appeals Fourth Circuit.

August 21, 1967.

David B. Buerger, Pittsburgh, Pa. (William Y. Rodewald and Buchanan, Ingersoll, Rodewald, Kyle & Buerger, Pittsburgh, Pa., on brief), for petitioner.

Crombie J. D. Garrett, Atty., Dept. of Justice (John B. Jones, Jr., Acting Asst. Atty. Gen., and Lee A. Jackson and Melva M. Graney, Attys., Dept. of Justice, on brief), for respondent.

Before HAYNSWORTH, Chief Judge, and SOBELOFF and BOREMAN, Circuit Judges.

HAYNSWORTH, Chief Judge:

For purposes of computing the maximum limitation upon an allowance for depletion to an operator of coal mines, we hold that an expenditure is not deductible in computing "taxable income from the property" when the taxable income generated by the expenditure is not includible in "gross income from the property."

In addition to ordinary fire insurance on its treatment plants, Island Creek Coal Company purchased business interruption insurance to indemnify it for losses in net profits resulting from lost production occasioned by fire damage to the treatment plants. Two of its treatment plants suffered extensive fire damage on the same day. Production was lost, and Island Creek collected from its insurance carrier, $240,664 as reimbursement for its losses in net profits. The receipt, of course, was taxable income to Island Creek, and, in computing the limitation upon its percentage depletion allowance under § 613 (a) of the Internal Revenue Code of 1954, Island Creek included that amount in its "gross income from the property," and deducted the related premium cost of $94,600 in computing its "taxable income from the property." This was an overstatement of its income from the property, as the taxpayer conceded in the Tax Court, for the income receipt was not properly attributable to mining.¹ The taxpayer contended, however, that, if the receipt was not includible in its gross income from mining, the related expenditure should be excluded from its deductions in computing its taxable income from the property. The Tax Court disagreed,² and the taxpayer sought review, protesting the reduction in its depletion allowance by the amount of the contested deduction.

Under § 613, a coal miner is entitled to a percentage depletion allowance equal to ten per cent of its "gross income from the property," which is defined in subsection (c) (1) as "gross income from mining." By subsection (c) (4), "mining" encompasses certain treatment processes, following actual extraction, including, in the case of coal, cleaning, breaking, sizing, protecting and loading the coal. All of the operations in Island Creek's treatment plants are thus treated as part of the mining process. Our problem arises, however, out of the ceiling imposed by § 613 (a), for if ten per cent of the gross income from the property exceeds fifty per cent of the taxable income from the property, the excess is not an allowable deduction. That limitation governs Island Creek's depletion allowance, occasioning the question of the propriety of including the cost of the premium in the deductions from gross income from mining to arrive at "taxable income from the property (computed without allowance for depletion)."

The statute does not explicitly define the term "taxable income from the property." There was no necessity of it, for the definition of "gross income from property" in terms of "mining" and the included treatment processes makes it perfectly clear that "taxable income from the property" means taxable income from mining and the included treatment processes. Taxable income from mining is computed by deducting from gross income from mining all of the mining expenses incurred in the production of that income. An expense incurred to produce income which is not income from mining, is not an expense of mining.

To be sure, the indirect expenses of mining must be deducted along with the direct expenses. These include overhead, taxes, allowable depreciation on capital assets used in the mining operation and the cost of money borrowed to acquire or construct such assets. If a taxpayer has only mining income, all of his ordinary expenses of doing business, including the cost of ordinary fire insurance to replace capital losses, are probably expenses of mining, for each contributes indirectly to the realization of income from mining. If a mine operator receives nonmining income, however, the...