Parsons v. Smith Huss v. Smith

• Decision Date: 06 April 1959
• Docket Number: 305,Nos. 218,s. 218
• Parties: Emory W. PARSONS, Erma M. Parsons, Howard H. Parsons, et al., Petitioners, v. Francis R. SMITH, Former Collector of Internal Revenue for the First District of Pennsylvania. George HUSS, Russell Huss and Wesley Huss, Petitioners, v. Francis R. SMITH, Former Collector of Internal Revenue for the First District of Pennsylvania
• Court: U.S. Supreme Court

359 U.S. 215

79 S.Ct. 656

3 L.Ed.2d 747

Emory W. PARSONS, Erma M. Parsons, Howard H. Parsons, et al., Petitioners,

v Francis R. SMITH, Former Collector of Internal Revenue

for the First District of Pennsylvania.

George HUSS, Russell Huss and Wesley Huss, Petitioners,

v. Francis R. SMITH, Former Collector of Internal Revenue

for the First District of Pennsylvania.

Nos. 218, 305.

Argued March 4, 1959.

Decided April 6, 1959.

Mr. Sherwin T. McDowell, Philadelphia, Pa., for petitioners Parsons et al.

Mr. David Berger, Philadelphia, Pa., for petitioners Huss et al.

Mr. Howard A. Heffron, New York City, for respondent.

Mr. Justice WHITTAKER delivered the opinion of the Court.

These tax refund cases present the question whether petitioners, Parsons in No. 218 and Huss in No. 305, are entitled to an allowance for depetion on amounts received by them under contracts with the owners of coal-bearing lands for the strip mining of coal from those lands and the delivery of it to the landowners. The cases were heard by the same courts below. The District Court ruled that petitioners had no depletable interest in the coal in place and rendered judgment for the respondent collector in each case. The Court of Appeals affirmed both judgments. 3 Cir., 255 F.2d 595, 599. Because of an asserted conflict with the principles applicable under the decisions of this Court, we granted certiorari in both cases. 358 U.S. 814, 79 S.Ct. 50, 3 L.Ed.2d 56.

The pertinent facts in each case were found by the District Court and are not challenged here. In substance, they are as follows:

PARSONS, No. 218. Petitioners were members of a partnership ('Parsons') which, until the transactions involved here, was primarily engaged in road building. Rockhill Coal Co. ('Rockhill') owned bituminous coal-bearing lands in Pennsylvania. Much of the coal was located relatively near the surface and was therefore removable by the strip mining process.¹ In 1942 Parsons expressed a desire to strip mine coal from Rockhill's lands, but it refused to sign the written contract offered because the firm did not wish to be bound by a contract 'which would take a long time, since, if an opportunity opened up, (it) wanted to go back to road building.' It was then agreed that Parsons would, and it did, proceed under an oral agreement. Under that agreement Parsons was to strip mine coal from such sites and seams, within a generally described area of Rockhill's lands, as were designated by Rockhill. Parsons was to furnish at its own expense all of the equipment, facilities and labor which it thought necessary to strip mine and deliver the coal to Rockhill's cars at a fixed point. For each ton of coal so mined and delivered Rockhill was to pay Parsons a stated amount of money.² Parsons was not authorized to keep or sell any of the coal but was required to deliver all that was mined to Rickhill. The agreement was not for a definite term, nor did it obligate Parsons to mine the tract to exhaustion, but, to the contrary, it was agreed that 'if Parsons or Rockhill wanted to quit, all that was necessary to terminate the arrangement was the giving of a ten-day notice.' However, if Rockhill thus canceled the agreement and if 'Parsons had previously gone to the expense of removing the overburden (thereby performing the heavy part of the work, as well as meeting wages and expenses in so doing), then Parsons would have the privilege of taking out the coal (so uncovered) and of being paid for it (even though) this took more than ten days.' Operations continued under the agreement without notice of termination until August 1, 1950, when Parsons gave Rockhill notice that it would 'quit' the work on September 1, 1950, and it ceased these operations on or near that date. Large amounts of stripable coal still remained on the tract and strip mining thereon was continued by another contractor. Parsons' investment in equipment used in the work ran from a low in 1943 of $60,000 to a high in 1947 of $250,000. The equipment was movable and there is no evidence that it was not usable elsewhere or for other purposes.

HUSS, No. 305. Petitioners were members of a partnership ('Huss') engaged in the business of strip mining coal. Philadelphia and Reading Coal & Iron Co. ('Reading') owned anthracite coal-bearing lands in Schuylkill County, Pennsylvania. Much of the coal was so located that it could be removed by strip mining. In 1944 Reading and Huss entered into a written contract³ under which Huss undertook to strip mine the coal from such areas, within a generally described tract of Reading's land, as might be designated by Reading and that was not lying deeper than a prescribed distance from the surface. Huss was to furnish at its own expense all of the equipment, facilities and labor necessary to mine and deliver the coal to Reading's colliery. For each ton of coal so mined and delivered Reading was to pay Huss a stated sum.⁴ That sum was agreed to be in 'full compensation for the full performance of all work and for the furnishing of all material, labor, power, tools, machinery, implements and equipment required for the work.' Huss was not authorized to keep or sell any of the coal. The contract was expressly terminable by Reading at any time upon 30 days' written notice 'without specifying any reason therefor' and without liability for 'any loss of anticipated profits or any other damages whatever.' This right of termination was not exercised. Operations continued under the contract until July 1947, by which time Huss had mined most of the strippable coal on the lands covered by the contract that lay within the stipulated distance from the surface, and the contract was then canceled by mutual agreement. Huss' investment in equipment used in the work ran from a low in 1944 of $100,000 to a high in 1947 of $500,000. All of the equipment was movable and usable elsewhere in strip mining and some of it was usable for other purposes.

Whether a deduction from gross income shall be permitted for depletion of mineral deposits, or any interest therein, is entirely a matter of grace.⁵ We therefore must look, first to the provisions and purposes of the statutes and to the decisions construing them to see what interests are permitted a deduction for depletion, and, next, to the contracts involved to see whether they gave to petitioners such an interest.

The applicable statutes are §§ 23(m) and 114(b)(4)(A) of the Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.) § 23(m) and 26 U.S.C. (1946 ed.) § 114(b)(4) (A), 26 U.S.C.A. §§ 23(m), 114(b)(4)(A). Section 23(m) directs that a reasonable allowance for depletion shall be made 'in the case of mines, * * * according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary,' and that '(i)n the case of leases the deductions shall be equitably apportioned between the lessor and lessee.' And § 114(b)(4)(A) provides that the allowance shall be, 'in the case of coal mines, 5 percentum * * * of the gross income from (mining)⁶ the property during the taxable year, exclud- ing * * * any rents or royalties paid or incurred by the taxpayer in respect of the property.'

The purpose of the deduction for depletion is plain and has been many times declared by this Court. '(It) is permitted in recognition of the fact that the mineral deposits are wasting assets and is intended as compensation to the owner for the part used up in production.' Helvering v. Bankline Oil Co., 303 U.S. 362, 366, 58 S.Ct. 616, 618, 82 L.Ed. 897. And see United States v. Ludey, 274 U.S. 295, 302, 47 S.Ct. 608, 610, 71 L.Ed. 1054; Helvering v. Elbe Oil Land Development Co., 303 U.S. 372, 375, 58 S.Ct. 621, 622, 82 L.Ed. 904; Anderson v. Helvering, 310 U.S. 404, 408, 60 S.Ct. 952, 954; Kirby Petroleum Co. v. Commissioner, 326 U.S. 599, 603, 66 S.Ct. 409, 411, 90 L.Ed. 343. '(The depletion) exclusion is designed to permit a recoupment of the owner's capital investment in the minerals so that when the minerals are exhausted, the owner's capital is unimpaired.' Commissioner v. Southwest Exploration Co., 350 U.S. 308, 312, 76 S.Ct. 395, 100 L.Ed. 347. Save for its application only to gross income from mineral deposits and standing timber, the purpose of 'the deduction for depletion does not differ from the deduction for depreciation.' United States v. Ludey, 274 U.S. at page 303, 47 S.Ct. at page 611. In short, the purpose of the depletion deduction is to permit the owner of a capital interest in mineral in place to make a tax-free recovery of that depleting capital asset.

Although the sentence in § 23(m) that 'In the case of leases the deductions shall be equitably apportioned between the lessor and lessee' presupposes 'that the deductions may be allowed in other cases' (Palmer v. Bender, 287 U.S. 551, 557, 53 S.Ct. 225, 226, 77 L.Ed. 489), the statute 'must be read in the light of the requirement of apportionment of a single depletion allowance' (Helvering v. Twin Bell Oil Syndicate, 293 U.S. 312, 321, 55 S.Ct. 174, 178, 79 L.Ed. 383), for two or more persons 'cannot be entitled to depletion on the same income' (Commissioner v. Southwest Exploration Co., 350 U.S. 308, 309, 76 S.Ct. 395, 396). It follows that if petitioners are entitled to a depletion allowance on the amounts earned under their contracts the amounts allowable to the landowners for the depletion of their coal deposits would be correspondingly reduced.

Dealing specifically with the problem of what interests in mineral deposits were permitted a deduction for depletion under the practically identical predecessors of §§ 23(m) and 114, this Court said in Palmer v. Bender, 287 U.S. 551, 557, 53 S.Ct. 225, 226: 'The language of the statute is broad enough to provide, at least, for every case in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any...