Jewell Ridge Coal Corporation v. CIR, 8863.

• Decision Date: 03 June 1963
• Docket Number: No. 8863.,8863.
• Citation: 318 F.2d 695
• Parties: JEWELL RIDGE COAL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

318 F.2d 695 (1963)

JEWELL RIDGE COAL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8863.

United States Court of Appeals Fourth Circuit.

Argued March 29, 1963.

Decided June 3, 1963.

Robert K. Eifler, Washington, D. C. (Seymour S. Mintz, and Hogan & Hartson, Washington, D. C., on brief), for petitioner.

Edward L. Rogers, Atty., Dept. of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and David O. Walter, Attys., Dept. of Justice, on brief), for respondent.

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

ALBERT V. BRYAN, Circuit Judge.

The Commissioner of Internal Revenue determined that the purchase by Jewell Ridge Coal Corporation of the outstanding indebtedness of the Oneida & Western Railroad Company, a majority of whose stock it simultaneously acquired, and Jewell's subsequent advances to the Railroad, constituted contributions to capital and not loans. With their deduction as bad debts disallowed on abandonment of the Railroad, an income tax deficiency for 1953 resulted. This assessment the Tax Court sustained. It also sustained the Commissioner's ruling that the loss of Jewell on the worthless stock did not occur in 1953 but in 1954, when the Railroad was liquidated.

As ultimate factual inferences refined from undisputed subsidiary findings and not clearly erroneous, the judgment of the Tax Court, on this petition of Jewell for review, must prevail. Commissioner v. Duberstein, 363 U.S. 278, 290-291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); Peebles v. Commissioner, 249 F.2d 92 (4 Cir., 1957). Even if taken as a legal resolution, the conclusion is sound. See Bogardus v. Commissioner, 302 U.S. 34, 38, 58 S.Ct. 61, 82 L.Ed. 32 (1937); Helvering v. Tex-Penn Oil Co., 300 U.S. 481, 490, 57 S.Ct. 569, 81 L.Ed. 755 (1937); Helvering v. Rankin, 295 U.S. 123, 131, 55 S.Ct. 732, 79 L.Ed. 1343 (1935).

A miner of coal in Virginia, West Virginia and Kentucky, Jewell in 1945 was considering the development of coal fields in Tennessee, near Oneida and Jamestown. Prospecting there, it found large acreages of first-rate mineable seams along the Oneida and Western Railroad. Successful working of these veins was already in progress, and only lack of initiative in the Railroad accounted for the absence of a more extensive winning and extraction of the deposits. In August 1946 Jewell resolved to open and lay out a colliery in the vicinity. The survey of the area led Jewell into the Railroad's history and financial status.

Oneida & Western, organized in 1912 by promoters of timber products, was 37 miles long, near the Cumberland River, and at one end connected with the Southern Railroad. The lumber industry had diminished substantially by 1937, and from then until 1942 the line had annual current deficits. Its road and equipment had an undepreciated value of about $800,000.00 but no funded debt. In February of that year Irving Crown, Michael S. Healy and James R. Healy acquired all of its capital stock. Crown conducted a building supply business, and the Healys were builders who had been awarded a contract by the United States for the erection of Wolf Creek Dam across the Cumberland. In this undertaking Crown would supply cement and other necessary materials and ship them to the site over the Railroad. The carrier thus would earn a handsome profit.

However, World War II postponed the Dam. Meanwhile, the Railroad with no increase in traffic was continued in a merely operable condition. An average loss of $20,000.00 each year was suffered, through most of 1946, advances to meet operations being made by Crown and an associate. The total indebtedness of the Railroad when it came under the eye of Jewell in that year was $127,322.10. The contract for the Dam was lost by the Healys when new bids were sought after the War. The Interstate Commerce Commission had been requested to authorize abandonment of the Road. Putting a value of $150,000 upon the Railroad unoperated, the Commission conditioned abandonment upon its owner's inability to obtain a purchaser at that figure.

In these circumstances Jewell closed negotiations with Crown and the Healys about September 1946 in a single transaction embracing: (1) the sale to Jewell at $17,500 of 6,000 acres of coal reserves bounding the Railroad and belonging to Crown and the Healys, (2) assignment to Jewell of the Railroad's entire indebtedness (notes and open account, all held by Crown and the Healys) in the face amount of $127,322.10, and (3) the entire existing Railroad stock — 7,500 shares — for $5,177.90. The total was $150,000, the equivalent of the defunct value of the Railroad. Actually, only 5,000 of the shares were for Jewell. Its president, St. Clair, with his family, received 1,350, the remainder of the stock going to others not here involved.

Before consummating the deal, Jewell had good reason to consider the fair value of the Railroad as a live concern to be between $400,000.00 and $500,000.00. Earnings just then slightly exceeded operating costs, taxes and other expenses, including depreciation but not interest. There was cause to believe that the depreciation allowance of $7,000.00 would be available each year for application to the debt. Larger net revenues were anticipated during the next two years from the building of the Dam and operation of Jewell's proposed mine. Aside from the depreciation allowance, the revenue estimates were $75,000.00 for the first two or three years and thereafter approximately $50,000.00 per annum — ample to retire the Railroad's debts.

Foreseeable, $37,500.00 was immediately required for the repair of a bridge and provision of working capital. Jewell through a local bank advanced this sum to the Railroad. For the next 18 months or more the Railroad showed a profit, and in 1948 appreciably curtailed the indebtedness. However, unforeseeable events turned the Railroad into an unprofitable enterprise: bridge repairs far exceeded the original approximation; calls for cement were delayed with the demand stretched over a period of four instead of the initially planned two years; and the Cumberland flood in the 1947-48 winter, and a labor strike in 1949, both prolonged the work on the Dam. Besides, the Jewell coal mine, with an expected minimum daily output of 2,000 tons, closed down in 1949, six months after starting — its roofing support had collapsed. Advances of $36,000 were made the Railroad by Jewell from February to April, 1947 for the increased bridge expense and to offset the disappointing car loadings, and $5,000 in 1948 and $5,000 in 1949 to satisfy State taxes.

After shutting up its mine in 1949, Jewell turned to the Railroad, looking especially for other probable sources of freight movement. There were several possibilities, including a steel mill contemplated by one of Jewell's principal stockholders. These Jewell thought justified further advances to the Railroad to keep it alive and to protect its money then in the Railroad, whether on credit or in capital. By December 21, 1953 the Railroad on its books owed Jewell $384,025.60.

All this indebtedness was evidenced by open accounts or demand notes at 3%, carried on Jewell's books as debts receivable. Interest was not accrued or demanded and, indeed, not expected before repayment of the principal. Corresponding entries were made on the accounts of the Railroad, with the approval of the Interstate Commerce Commission.

In July 1952 or shortly...