Pittston-Duryea Coal Co. v. Commissioner of Int. Rev.

• Decision Date: 24 January 1941
• Docket Number: No. 7476.,7476.
• Citation: 117 F.2d 436
• Parties: PITTSTON-DURYEA COAL CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

117 F.2d 436 (1941)

PITTSTON-DURYEA COAL CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 7476.

Circuit Court of Appeals, Third Circuit.

January 24, 1941.

Leo W. White, of Pittston, Pa., and Robert S. Pasley, Jr., of New York City (Leo W. White, of Pittston, Pa., and Robert S. Pasley, Jr., of New York City, of counsel), for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch and Lee A. Jackson, Sp. Assts. to Atty. Gen., for respondent.

Before BIGGS, MARIS, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

This appeal from a decision of the Board of Tax Appeals raises the question of the proper interpretation of section 114 (b) (4) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 702.¹

In 1934 the Pittston-Duryea Coal Company, the taxpayer, acquired leases of certain coal mining property in Pennsylvania without any original cost. These properties were mined by the taxpayer in 1934 and 1935 and during those years were the only properties worked by it. Its mining operations in 1934 resulted in a net loss, without any allowance for depletion, although it did have other income, mainly from breaker operations. No deduction for depletion was set forth in the 1934 return, nor was any statement made in the return as to the basis for computing depletion, because the property had no cost basis and a loss was sustained from the mining operations. In 1935 the taxpayer realized a net profit from its mining operations and claimed a deduction for depletion computed by the percentage method. The Commissioner disallowed the deduction on the ground that the taxpayer's failure to elect the percentage basis for depletion in its 1934 return committed it irrevocably thereafter to the cost basis, and since the cost was zero the taxpayer was not entitled to any depletion allowance. The Board sustained the Commissioner.

Section 23 (m) of the Revenue Act of 1934 grants as a deduction from gross income "a reasonable allowance for depletion". The basis for depletion is referred by § 23 (n) to § 114. Section 114 (b) (1) provides that the basis for depletion is governed by the provisions of § 113 (b) except as provided in subsections 2, 3 and 4 of § 114 (b). So far as is here material the basis provided for by § 113 (b) is cost. In section 114 (b) (4) it is provided that:

"* * * A taxpayer making his first return under this title in respect of a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion, and the depletion allowance in respect of such property for such year shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return the depletion allowance for such property for such year shall be computed without reference to percentage depletion. The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer * * *."

We disagree with the government's contention that this section required the taxpayer to choose either the percentage or cost method of computing depletion in its 1934 return. The argument is based upon what is to us an unwarranted emphasis upon the words: "A taxpayer making his first return under this title * * *." Statutes are not to be read piecemeal; particular phrases derive content from the context. Further, "statutes must be construed in the light of their purpose. A literal reading of them which would lead to absurd results is to be avoided when they can be given a reasonable application consistent with their words and with the legislative purpose". Haggar Co. v. Helvering, 1940, 308 U.S. 389, 394, 60 S. Ct. 337, 339, 84 L.Ed. 340. We think it would be an absurd result to construe this statute to require the taxpayer to choose a method of depletion and to state the method when there is nothing from which to make the deduction.

Two purposes are clearly evident in the section under consideration. The first is to give to the taxpayer the choice of electing the method of computing its depletion allowance in a particular year. The second is to hold him to that...