St. Louis, Rocky Mountain & Pacific Co. v. Comm'r of Internal Revenue, Docket No. 57507.

• Decision Date: 15 April 1957
• Docket Number: Docket No. 57507.
• Citation: 28 T.C. 28
• Parties: ST. LOUIS, ROCKY MOUNTAIN AND PACIFIC COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

28 T.C. 28

ST. LOUIS, ROCKY MOUNTAIN AND PACIFIC COMPANY, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 57507.

Tax Court of the United States.

Filed April 15, 1957.

[28 T.C. 28]

Floyd K. Haskell, Esq., for the petitioner.

Richard C. McLaughlin, Esq., for the respondent.

Premium paid by petitioner to its bondholders upon the repurchase of its outstanding first mortgage bonds and interest paid to a trustee under bond indenture are deductions which must be allocated between income from mining operations and income from other activities in computing the 50 per cent of net income limitation on petitioner's coal depletion deduction under section 114(b) (4), I.R.C. 1939.

OPINION. WITHEY, Judge:

The respondent determined deficiencies in petitioner's income tax for the indicated years as follows:

+--------------------+
                ¦Year ¦Deficiency ¦
                +------+-------------¦
                ¦1951 ¦$5,571.96 ¦
                +------+-------------¦
                ¦1952 ¦19,276.85 ¦
                +--------------------+
                

The issues presented by the pleadings and not disposed of by stipulation are the correctness of the respondent's action (1) in determining that premiums paid by petitioner to its bondholders for the repurchase of its first mortgage bonds during 1951 and 1952 and the amount paid to the trustee under bond indenture during 1952 are deductions which must be allocated between income from mining operations and other income in determining the net income limitation under section 114(b)(4) of the Internal Revenue Code of 1939 for the purpose of computing petitioner's coal depletion allowance, and (2) in determining that a payment in the amount of $40,590.09 made to petitioner by the Continental Oil Company in 1952 was not subject to depletion under section 114(b)(3) of the 1939 Code.

All of the facts have been stipulated and are found accordingly.

[28 T.C. 29]

Petitioner (sometimes hereinafter referred to as St. Louis) is a corporation organized under the laws of the State of New Mexico, with its principal office located in Raton, New Mexico. During the years in issue, and for may years prior thereto, St. Louis was engaged in the production of coal.

Petitioner's income tax returns for 1951 and 1952 were filed with the director of internal revenue for the district of New Mexico at Albuquerque, New Mexico. Petitioner kept its books and prepared its income tax returns on an accrual basis of accounting.

Petitioner's production of coal reached a peak at the close of World War II. The decrease in its coal production was due in large part to the advent of more economical sources of fuel.

During the years 1918 to 1952, St. Louis did not acquire any new coal-producing properties. During those years it had more cash available than was required for its normal operations. Accordingly, petitionerS directors decided to adjust its capital structure.

On November 29, 1937, petitioner was authorized by its stockholders to write down its property account in the amount of $1,500,000 and to reduce the par value of its common stock from $25 per share to $10 per share, thereby reducing its common stock account from $2,500,000 to $1,000,000.

Petitioner's board of directors revalued its properties in December 1937 and decided that a consolidation of its capital structure was desirable in view of the economic conditions affecting the industry.

Consequently, to accelerate the release of its properties from a mortgage lien, petitioner commenced the repurchase of its outstanding 5 per cent first mortgage bonds maturing July 1, 1955. The bonds were redeemable at par on that date. The number of bonds purchased during the indicated years and the resulting discount income or premiums were as follows:

+--------------------------------------------------------------+
                ¦ ¦ ¦ ¦ ¦Purchase ¦Accrued ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦Year¦Number ¦Par value¦(Discount) ¦price of ¦interest paid¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦ ¦of bonds¦ ¦or premium ¦bonds ¦upon purchase¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1936¦218 ¦$218,000 ¦($34,585.00)¦$183,415.00¦$266.39 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1937¦136 ¦136,000 ¦(24,651.25) ¦111,348.75 ¦3,291.69 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1938¦227 ¦227,000 ¦(93,915.00) ¦133,085.00 ¦5,488.61 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1939¦45 ¦45,000 ¦(17,995.00) ¦27,005.00 ¦737.22 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1940¦23 ¦23,000 ¦(12,393.75) ¦10,606.25 ¦392.92 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1941¦249 ¦249,000 ¦(138,867.38)¦110,132.62 ¦460.12 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1942¦191 ¦191,000 ¦(57,107.50) ¦133,892.50 ¦4,181.73 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1943¦172 ¦172,000 ¦(36,130.97) ¦135,869.03 ¦2,125.52 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1944¦98 ¦98,000 ¦(6,375.00) ¦91,625.00 ¦1,069.16 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1945¦126 ¦126,000 ¦(2,251.50) ¦123,748.50 ¦1,435.13 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1946¦20 ¦20,000 ¦ ¦20,000.00 ¦347.22 ¦
                +----+--------+---------+------------+-----------+-------------¦
                ¦1947¦18 ¦18,000 ¦ ¦18,000.00 ¦318.89

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