Parsons v. Smith, 12299-12301.
| Decision Date | 27 March 1958 |
| Docket Number | No. 12299-12301.,12299-12301. |
| Citation | 255 F.2d 595 |
| Parties | Emory W. PARSONS and Erma M. Parsons, Appellants, v. Francis R. SMITH, Former Collector of Internal Revenue for the First District of Pennsylvania. Howard H. PARSONS and Martha Parsons, Appellants, v. Francis R. SMITH, Former Collector of Internal Revenue for the First District of Pennsylvania. Lawrence H. PARSONS and Grace E. Parsons, Appellants, v. Francis R. SMITH, Former Collector of Internal Revenue for the First District of Pennsylvania. |
| Court | U.S. Court of Appeals — Third Circuit |
Sherwin T. McDowell, Philadelphia, Pa. (William R. Spofford, Charles I. Thompson, Jr., Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., on the brief), for appellants.
Marvin W. Weinstein, Washington, D. C. , for respondent.
Before BIGGS, Chief Judge, and GOODRICH and HASTIE, Circuit Judges.
These are appeals by taxpayers, who are partners in a business, from a judgment of the district court denying their several claims for refunds of income taxes paid upon their respective distributable shares of certain partnership income derived from coal mining. The appellants can prevail only if the involvement of the partnership, hereinafter called Parsons, in a strip mining enterprise was such as to entitle the partners to deduct a depletion allowance, pursuant to Sections 23(m) and 114(b) of the Internal Revenue Code of 1939, 26 U.S.C. §§ 23(m), 114(b), as implemented by Treasury Regulation 111, § 29.23 (m)-1, 26 Code Fed.Reg., 1949 ed., § 29.23(m)-1, in computing partnership income from the mining operation. The problem presented is the often difficult, though familiar and recurring one of determining whether the person claiming a depletion allowance is "the owner of an economic interest in mineral deposits" within the meaning of Treasury Regulation 111, § 29.23(m)-1.1
The almost simultaneous recent decisions of this court in Commissioner of Internal Revenue v. Mammoth Coal Co., 1955, 229 F.2d 535, certiorari denied 352 U.S. 824, 77 S.Ct. 31, 1 L.Ed.2d 47, and of the Court of Appeals for the Ninth Circuit in Usibelli v. Commissioner of Internal Revenue, 1955, 229 F.2d 539, have gone so thoroughly into this tax problem as it arises in the context of strip mining that we shall not elaborate again the basic concepts which are discussed in those cases. It is enough to repeat that the decisions make it clear that the economic interest in coal in place which will support a percentage depletion allowance for strip mining need not amount to an estate or tenancy as understood in the law of real property. Yet, it must be something more than an independent contractor's normal right to the benefit of his bargain and the kind of "interest" which that right always gives him in the subject matter of the contract. In characterizing an asserted interest a court will be guided by the total picture revealed by the facts of the case at hand.
On this appeal the facts found by the district court are unchallenged. The Parsons firm is a contractor and over the years has engaged in road building, strip mining and the drilling of gas wells. Parsons derived the income involved in this case from strip mining conducted on land owned by the Rockhill Coal Co.
In preliminary negotiations Rockhill had proposed that Parsons undertake extensive stripping of the area in question under a detailed written contract and, to that end, Rockhill actually drafted a proposed contract. But Parsons refused to sign the agreement stating that it did not wish to be bound to a long term performance because, if opportunity should arise, it wished to return to road building. Accordingly, it was agreed that the partnership would proceed with stripping in the designated area under a terminable oral agreement. The essential provisions of that oral contract are set out in the trial findings.
The agreement defined the area to be mined but left the partnership free to work as it chose. The partnership understood that it was not obligated to mine the tract to exhaustion. Indeed, although operations under the oral agreement were conducted from time to time over an eight year period, the tract still contained much strippable coal when Parsons terminated its operations. Some of this coal was later mined by another contractor. Moreover, it was mutually understood from the beginning, in the light of the already mentioned desire of the partnership to be free to change from stripping to road building on short notice, that either party could terminate the oral agreement on ten days notice. In this connection it was understood that after notice of termination by the landowner the partnership would still be privileged to remove and the landowner obligated to accept usable coal from which the partnership had actually removed the overburden — this constituting the major part of the stripping operation — before the notice was received.
It was agreed that the partnership should deliver the coal it mined to Rockhill's railroad cars and to no one else. In practice any coal which Rockhill rejected as unsuitable for its purposes was left in the pits as unsaleable. The parties agreed in advance upon a stipulated price per ton which Rockhill was to pay Parsons for usable coal. This price was not geared to and did not vary with the market price of coal. However, the price could be and on occasion was altered to reflect increased costs of production.
Parsons made a considerable investment in movable equipment used in the Rockhill stripping operation. Early in the taxable period the partnership committed to this job its own equipment valued at some $210,000. At the same time it was using about $130,000 worth of Rockhill equipment under a rental agreement with the landowner. As the work progressed the partnership rented an increasing amount of Rockhill equipment and used less of its own. There is no indication that the partnership equipment had utility only for this job or was specially adapted to it.
We are satisfied that what the parties agreed and what they did disclose the partnership acting only as an ordinary independent contractor in mining the Rockhill tract. First, the matter of compensation was handled as in an ordinary contract job. The partnership had no freedom to sell or dispose of the coal to its own account. It was entitled only to an agreed price from the owner of the mining property. And since that price did not fluctuate with the market, there is nothing about the scheme of payment to indicate any interest of the contractor in the mineral. If we ask how this arrangement for payment to the partnership for its work differed from the normal payment to an independent contractor for accomplishing an agreed result, it is immediately apparent that there is no significant difference.
The other important factor on this record is the agreed duration of the enterprise. Here it is noteworthy that the partnership did not enter the job with any understanding that it would mine the tract to exhaustion, and that it did not in fact do so. Rather, it was concerned from the beginning to remain free to discontinue stripping at any time. The terminability of the agreement on short notice was an essential and significant part of the bargain, not a mere formality inserted by some cautious draftsman. The logical conclusion from all of this is that the partnership contemplated and bargained for no economic interest in the mineral it agreed to extract beyond the independent contractor's normal concern with any subject matter with which he is to work for an agreed price. True, the ten day notice could not be used to deprive Parsons of compensation for work it already had done in removing the overburden from particular coal. But this special limited right to complete work already far advanced does not destroy the character of the contract as one deliberately made terminable on very short notice.
The cases support this view of the matter. While the courts characteristically look at the entire context in...
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Parsons v. Smith Huss v. Smith
...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 case......
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Denise Coal Company v. CIR, 12726-12728.
...asset." Often it is the stripper who claims the depletion deduction or part of it. This Court had that situation in Parsons v. Smith, 3 Cir., 1958, 255 F.2d 595, affirmed 1959, 359 U.S. 215, 79 S.Ct. 656, 3 L.Ed.2d 747, and Huss v. Smith, 3 Cir., 1958, 255 F.2d 599, affirmed, 1959, 359 U.S.......
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United States v. Stallard, 7904.
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