Swank v. United States

• Decision Date: 18 July 1979
• Docket Number: No. 403-75,49-77 and 400-77.,403-75
• Citation: 602 F.2d 348
• Parties: Elwood SWANK and Rita Swank v. The UNITED STATES. BLACK HAWK COAL CORPORATION, INC. v. The UNITED STATES. BULL RUN MINING CO., INC. v. The UNITED STATES.
• Court: U.S. Claims Court

602 F.2d 348

Elwood SWANK and Rita Swank v. The UNITED STATES.

BLACK HAWK COAL CORPORATION, INC. v. The UNITED STATES.

BULL RUN MINING CO., INC. v. The UNITED STATES.

Nos. 403-75, 49-77 and 400-77.

United States Court of Claims.

July 18, 1979.

Lloyd R. Persun, Harrisburg, Pa., atty. of record, for plaintiffs in No. 403-75; Howell C. Mette and Shearer, Mette & Woodside, Harrisburg, Pa., of counsel.

James L. Malone, III, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant in No. 403-75; Theodore D. Peyser, Jr., and Robert S. Watkins, Washington, D. C., of counsel.

LeRoy H. Katz, Washington, D. C., atty. of record, for plaintiff in No. 49-77; Katz, Kantor, Katz, Perkins & Cameron, and Richard L. Hirshberg, Washington, D. C., of counsel.

James L. Malone, III, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant in No. 49-77; Theodore D. Peyser, Jr., Robert S. Watkins and Judith H. Johnson, Washington, D. C., of counsel.

Woodrow A. Potesta, Fairmont, W. Va., atty. of record, for plaintiff in No. 400-77.

James L. Malone, III, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant in No. 400-77; Theodore D. Peyser, Jr., Robert S. Watkins and Jo-Ann Horn, Washington, D. C., of counsel.

Before DAVIS, KASHIWA and BENNETT, JJ.

PER CURIAM.

These three tax refund suits, consolidated for argument, all present the single question of whether a provision in a coal-mining lease permitting termination by either party (or by the lessor alone) on 30 days' notice precludes the plaintiff-lessees from having an "economic interest" in the coal in place which would entitle them to a percentage allowance for depletion under sections 611 and 613 of the Internal Revenue Code of 1954. The Government admits that, in the absence of this 30-day termination provision, the lessees would all be entitled to such a depletion allowance.¹

Though they all involve the single issue we have stated, the cases come before the court in different ways and concern different tax years. No. 403-75, involving 1966 and 1967, was tried before Trial Judge Bernhardt who has rendered his decision that plaintiffs are entitled to recover. No. 49-77, involving 1970-1972, is before us on a stipulation of facts. No. 400-77, involving fiscal 1974, comes to us on cross-motions for summary judgment. It is unnecessary to set forth here the individual facts because for present purposes the cases are legally all the same.²

Each taxpayer held a lease (or leases) of coal-bearing property with unstated duration or duration for a term of years—subject to the termination clause or clauses. These leases provided for royalties (plus, in at least one of the cases, a flat annual rent) to be paid by the lessee³ and gave him the right to extract coal and to sell it to whomever and at whatever price he chose.⁴ Each lease contained a clause permitting either party (or the lessor alone) to terminate the lease (and operations thereunder), apparently without cause, within thirty days. In each case the plaintiffs mined coal under these leases during the taxable years and for a substantial time before. The proceeds from the sales of the coal represented the sole source of revenue from which the lessees could recover any rents and royalties paid to the lessor for the right to mine.

On these facts, as defendant recognizes (and as Trial Judge Bernhardt held in No. 403-75), the cases are each governed by our decision in Bakertown Coal Co. v. United States, 485 F.2d 633, 202 Ct.Cl. 842 (1973), which presented the identical issue on facts practically the same as those now before us. This panel cannot, under this court's practice, depart from that holding. See Dravo Corp. v. United States, 594 F.2d 842, 843, 219 Ct.Cl. ___, ___ (1979). Nor have we been persuaded that Bakertown was wrongly decided or that we should ask the court en banc to reconsider the issue.⁵

The Government picks at this or that aspect of the Bakertown opinion, but the core holding of that case remains—that coal-mining lessees with leases like those in Bakertown (and in these cases) have an "economic interest" in the coal, entitling them to percentage depletion for the coal mined during the taxable years, even though those leases could theoretically and legally have been terminated by the lessor, without cause, on 30 days' notice; the mere existence of the unused termination clause is not enough to deprive the taxpayer-lessees of their "economic interest" they would otherwise admittedly have. Except for Whitmer v. Commissioner, 443 F.2d 170 (3rd Cir. 1971)—with which the Bakertown court expressly disagreed—we know of no Supreme Court or Court of Appeals holding in conflict with this ruling of Bakertown.

Defendant says that Bakertown overstressed the difference between the true coal-lessees and coal contract-miners, and that the name or legal form of the mining arrangement is immaterial in determining "economic interest." We are told that what is important in appraising whether the taxpayer has acquired by investment such an interest in the coal in place is whether that taxpayer has, and can have, an adequate expectation at the beginning of the arrangement (or perhaps of the taxable year) that he will be permitted to mine to exhaustion or at least to mine a substantial amount of the coal,⁶ and therefore will be able to appraise both his interest in the coal in place and what portion of that interest he has extracted during the taxable period. This need for advance calculation follows, defendant says, from the historical fact that percentage depletion was introduced as a substitute method of calculation for discovery depletion; on the Government's premise, in all the methods of depletion the taxpayer, to be entitled to the deduction, has to be able to estimate in advance his full interest in the minerals in place so that he can determine (at least roughly) what part he has actually taken out of the ground during the particular period. With the 30-day cancellation clause, the argument goes, the coal miner or lessee cannot make such an advance estimate because he has and can have no such expectation beyond a month's time.

Even were we to accept defendant's premise that leases are no different for our purposes from mere contract mining arrangements, we could not deny depletion to the present taxpayers. For the records in these cases (as in Bakertown) show that each of the taxpayers had regularly mined coal from the leases in question for a very substantial period prior to the taxable years⁷ and that, in all reality, they had a very good expectation of being able to continue to do so. In Nos. 403-75 and 400-77, we accept the showing that the lessors rarely (if ever) terminated without cause, not as demonstrating that the lessors lacked the legal power to terminate without cause,⁸ but solely as showing that in practice and in reality the plaintiff coal-lessees had, at all relevant times, a solid expectation that they could continue under their leases to mine the coal for a substantial period and to extract a substantial amount of the coal.⁹ This means — unless we are to depart from defendant's own norm for testing "economic interest" by substance and reality, rather than by mere nomenclature or the theoretical form of the legal arrangement — that taxpayers are entitled to depletion. They satisfy the proffered criterion of knowing in advance that they will be able to mine for a substantial period and to extract a substantial portion of the coal. Certainly this was true at the beginning of each of the taxable years.

If, however, we must look (contrary to the theme of the Government's presentation) only to the theoretical and legal right of the lessor to cancel within 30 days as if there was such a real possibility every month,¹⁰ we cannot say a priori that a month's period is too short for a miner to expect to extract a substantial amount of coal. There is no such proof before us and we do not believe it is a matter of judicial notice. Like Bakertown, these cases do not involve leases terminable within a single day.

Finally, we reiterate what was said in Bakertown, 485 F.2d at 642, 202 Ct.Cl. at 857, about the non-availability in these cases of the depletion allowance to the lessors or anyone else. If plaintiffs are not entitled, there will be no depletion on the coal mined under these leases. The Government insists that every applicant for the allowance must show his own entitlement. We agree, but think that Congress, in establishing percentage depletion, intended that, except for extraordinary instances, someone should be entitled to depletion on all mined coal covered by the Code provision. Cf. I.R.C. § 613(c). Where there can be no other claimant, we believe that neither the Internal Revenue Service nor the courts should be too technical or too harsh in finding the only possible applicant to be ineligible. The considerations are in some (though of course not all) respects different from the cases in which a choice has to be made among competing claimants.

Conclusion

For these reasons, we conclude as follows:

(a) In No. 403-75, we adopt the trial judge's opinion (and set it forth infra) and his findings, and on that basis, as well as on the foregoing per curiam opinion, we hold that plaintiffs are entitled to recover taxes and interest assessed, plus interest as provided by law.

(b) In No. 49-77, on the basis of the stipulated facts and the foregoing per curiam opinion, we hold that plaintiff is entitled to recover taxes and interest assessed, plus interest as provided by law.

(c) In No. 400-77, we grant plaintiff's motion for summary judgment and deny defendant's cross-motion for summary judgment, and hold that plaintiff is entitled to recover interest and taxes assessed, plus interest as provided by law.

(d) In each case, the amount of recovery will be determined...