Marsh Fork Coal Co. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 10453.

• Decision Date: 18 April 1928
• Docket Number: Docket No. 10453.
• Parties: MARSH FORK COAL Co., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

11 B.T.A. 685 (1928)

MARSH FORK COAL Co., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 10453.

Board of Tax Appeals.

Promulgated April 18, 1928.

Theodore B. Benson, Esq., for the petitioner.

Orris Bennett, Esq., and Hartford Allen, Esq., for the respondent.

In this proceeding the petitioner seeks a redetermination of its income and profits taxes for the year 1920 for which the Commissioner has determined a deficiency of $19,703.86. The petitioner alleges error on the part of the Commissioner, (1) in determining that the March 1, 1913, value of a leasehold on coal and timber lands acquired in 1911 was not in excess of the cost; (2) in disallowing as a deduction from income the cost of certain locomotives and mining machines and equipment necessary to maintain the normal output of its mines, and certain expenditures made for repairs; (3) in failing to allow a deduction for depreciation on assets restored to capital in 1920 and prior years; (4) in failing to include in invested capital certain royalties and taxes paid on inactive and undeveloped lands; and (5) in refusing to compute the tax under section 328 of the Revenue Act of 1918.

Other issues raised in the petition were withdrawn by the petitioner at the hearing.

The Commissioner asks for affirmative relief by increasing net income by $19,609.27, representing capital items erroneously allowed as deductions from income less allowable depreciation thereon.

FINDINGS OF FACT.

The petitioner is a corporation organized in 1911, under the laws of the State of West Virginia, under the name of Marsh Fork Splint & Gas Coal Co. On December 31, 1914, the name was changed to Marsh Fork Coal Co. The petitioner's principal offices were at Charleston, W. Va.

Prior to the incorporation of the Marsh Fork Splint & Gas Coal Co., and earlier in the year 1911, one W. H. Pettus, acting in association with T. E. B. Siler and Frank Fascinoli, entered into negotiations with the Rowland Land Co. for a lease to certain coal lands. These men having organized the Marsh Fork Splint & Gas Co., a stockholders' meeting was held August 25, 1911, and the following resolution was passed:

WHEREAS, under date of July 1, 1911, the Rowland Land Company entered into an agreement with W. H. Pettus for a lease on certain coal lands on Little Marsh Fork, in Raleigh County, West Virginia, which lands are therein described; and,

WHEREAS, the said W. H. Pettus has offered to sell all his rights under said agreement to the Marsh Fork Splint & Gas Coal Company, in consideration of $17,740.00, of which sum $2,740.00 has been paid to the Rowland Land Company upon condition that said amount shall be a credit upon any royalties to accrue under and by virtue of said lease.

THEREFORE, RESOLVED, That the proper officers of this Company be authorized to enter into an agreement with W. H. Pettus for the assignment of all his rights under and by virtue of said agreement, and pay unto the said W. H Pettus the sum of $17,740.00, in full consideration therefor.

RESOLVED, FURTHER, That the President be and is hereby authorized to enter into a lease with said Rowland Land Company, according to the terms and conditions of said agreement of July 1, 1911, and the form of lease thereto attached.

On motion the same was duly carried.

On August 31, 1911, the petitioner entered into a lease with the Rowland Land Co. which provided in part as follows:

THIS DEED, Made this 31st day of August, 1911, between the ROWLAND LAND COMPANY, a corporation of West Virginia, of the first part, hereinafter called "the Lessor" and MARSH FORK SPLINT & GAS COAL COMPANY, of the second part, hereinafter called "the LESSEE."

WITNESSETH:

PROPERTY AND TERM

FIRST: That the Lessor, for and in consideration of Five Dollars, cash in hand paid, the receipt whereof is hereby acknowledged, and of the covenants and agreements herein contained, to be kept and performed by the Lessee, and the rents and royalty herein reserved and mentioned to be paid by the Lessee, doth hereby let and demise for coal mining and coking purposes only unto the Lessee for the term of thirty (30) years from and after the date hereof, all those certain lands and interests in land situated in Raleigh County, West Virginia, and bounded and described as follows, to-wit:

PARCEL NO. 1.

A certain tract or parcel of land lying between the Clear Fork and Little Marsh Creeks, * * * containing 787.809 acres in Clear Fork District and 678.015 acres in Marsh Fork District.

PARCEL NO. 2.

Also another certain tract or parcel of land lying on the waters of Little Marsh Creek between the Four States Coal and Coke Company line, Little Marsh Creek and the Birch Fork, in Marsh Fork District, * * * containing 1401.25 acres

* * * * * * *

RIGHTS

SECOND: And for the term of this lease the exclusive right and privilege is granted by the Lessor to the Lessee to mine and dig coal in and from any and all seams of coal in and upon the hereinbefore demised premises, and to sell, carry away and ship the same, or to use the same upon the demised premises in making coke or otherwise, and to use such part or parts of the demised premises and such rights, rights of way, privileges and appurtenances thereunto belonging or in anywise appertaining as may be necessary for the purpose of making coke or other coal products thereon, and shipping such coal, coke or other coal products therefrom, and generally for any purpose the Lessee may desire properly incidental to its coal and coke business; subject, nevertheless, to the exceptions and reservations hereinafter contained with respect to rights of way and timber, oil, gas and minerals other than coal, which are or may be found upon the demised premises; and subject, also, to such reservations and exceptions as are contained in the various deeds under which, mediately or immediately, the Lessor derives title to the property hereby demised, and to the rights hereinafter reserved for roads, tramroads, railroads and uses by the Lessor or its assigns. And the Lessee shall also have the right and privilege of taking from that portion of the demised premises owned in fee by the Lessor such stone, timber, (except the timber hereinafter reserved), sand and water as may be necessary or convenient for use by the Lessee in its operations under this lease or in the construction of any buildings or improvements of any kind upon the demised premises; but no timber, stone, sand or water shall be removed from or used by the Lessee off the demised premises.

RESERVATIONS

THIRD: The Lessor reserves from the operation of this lease all the timber on the demised premises which on the first day of January, 1904, measured ten (10) inches in diameter under the bark four (4) feet from the ground, together with the right for forty (40) years from and after said first day of January, 1904, to cut, manufacture and remove said timber and to occupy so much of the surface of the demised premises as may be necessary for such roads, tramroads, and railways, and for such manufacturing plants as may be needed or convenient for the purposes aforesaid and for the removal of any of the timber now owned or that may hereafter be acquired by the persons or corporations now owning said timber on the demised premises hereby reserved, or their assigns, adjacent to said land or in that general locality, the said timber and rights have been reserved in the conveyance of the demised premises to the lessor; * * *

* * * * * * *

OPERATIONS

SIXTH: No coal or coke from lands other than the demised premises shall be by the Lessee hauled through or over the demised premises or any part thereof, or loaded into railway cars from tipples or other loading places upon the demised premises; and no coal or coke mined from or made upon the demised premises shall be loaded into railway cars over any tipple or other loading place or loading tracks not upon the demised premises; and Lessee shall not remove any coal from the demised premises in order to manufacture coke or other coal products therefrom, the intent hereof being that all tipples, loading tracks, ovens and other improvements for any such purposes shall be situate upon the demised premises.

ROYALTY

SEVENTH: In consideration of this lease and the rights and privileges hereby granted, the Lessee covenants and agrees to pay to the Lessor, subject to the terms and conditions herein contained, royalty for all coal mined and shipped from or used in coke making or otherwise upon the demised premises at the rate of eight (8) cents per net ton of two thousand (2,000) pounds run of mine; and the Lessee covenants and agrees to pay Lessor a fixed or minimum rent or royalty upon the hereinbefore demised premises of Eighty-six Hundred Dollars ($8,600) for the year beinning one (1) year after rails shall be laid on a railroad up Little Marsh Fork to the upper line on said fork of the leased premises, Eleven Thousand, Four Hundred Sixty-Eight Dollars and 29/100 (.29) ($11,468.29) for the first year thereafter, and Fourteen Thousand, Three Hundred and Thirty-Five and 36/100 Dollars ($14,335.36) for the second year thereafter and each succeeding year of this lease, whether the coal mined in any year amounts, at the rate of royalty aforesaid, to the minimum rent or royalty for such year or not. And if the said Lessee shall not mine in any calendar year as much coal as shall, at the said rate of royalty, amount to the minimum royalty for such year, it shall have the right during the two (2) calendar years next succeeding of this lease to mine free of charge enough coal at the rate of royalty aforesaid to make up the difference between the royalty at the rate aforesaid on the coal actually mined in such year and the minimum royalty so paid for such year without interest; providing that no coal shall be mined free on account of any such deficiency until the amount of coal required to pay the minimum royalty for the year in which...