UNITED STATES V. SWANK
| Citation | 451 U. S. 571 |
| Decision Date | 18 May 1981 |
| Court | United States Supreme Court |
CERTIORARI TO THE UNITED STATES COURT OF CLAIMS
Held: The "percentage depletion" allowance under §§ 611 and 613 of the Internal Revenue Code of 1954 -- whereby the owner of an economic interest in a mineral deposit is allowed a special deduction from taxable income measured by a percentage of his gross income derived from exhaustion of the mineral -- may not be denied to respondent lessees of underground coal who had the right to extract and sell the coal at prices fixed by them, paying a fixed royalty per ton to their lessors, merely because their leases were subject to termination by the lessor on 30 days' notice. P P. 576-585.
(a) The deduction provides a special incentive for engaging in the mining business that goes well beyond a purpose of merely allowing the owner of a wasting asset to recoup the capital invested in that asset, and hence eligibility for the deduction is determined not by the amount of the capital investment, but by the mine operator's "economic interest" in the coal. The question here is whether the deduction for the asset depleted by respondents will be received by anyone, since the tax consequences of the lessors' receipt of royalties will not be affected, either favorably or unfavorably, by the decision. P P. 576-579.
(b) Under their leases, respondents had a legal interest in the coal both before and after it was mined, and were free to sell the coal at whatever price the market could bear. Thus, they had a depletable "economic interest" in the coal deposits, not merely an "economic advantage." Parsons v. Smith, 359 U. S. 215, and Paragon Jewel Coal Co. v. Commissioner, 380 U. S. 624, distinguished. Nor does the right to terminate give the lessor the only significant economic interest in the coal as a matter of "practical economics." It is by no means certain that an increase in the price of coal will induce a lessor to terminate a satisfactory business relationship, and it would be unfair to deny a lessee a tax benefit that is available to competitors simply because he accepted the business risk of termination that his competitors were able to avoid when they negotiated their mining leases. Moreover, the Government has not suggested any rational basis for linking the right to a depletion deduction to the period of time that the taxpayer operates a mine. Thus, the mere existence of the lessors' unexercised
right to terminate respondents' leases did not destroy their economic interest in the leased mineral deposits. P P. 579-585.
221 Ct.Cl. 246, 602 F.2d 348, affirmed.
The owner of an economic interest in a mineral deposit is allowed a special deduction from taxable income measured by a percentage of his gross income derived from exhaustion of the mineral. This deduction, codified in §§ 611 and 613 of the Internal Revenue Code of 1954, is designed to compensate such owners for the exhaustion of their interest in a wasting asset, the mineral in place. [Footnote 1] This case presents the question
whether that "percentage depletion" allowance must be denied to otherwise eligible lessees of underground coal because their leases were subject to termination by the lessor on 30 days' notice.
This question arises out of three different tax refund suits that were decided by the Court of Claims in a single opinion. 221 Ct.Cl. 246, 602 F.2d 348. The controlling facts are essentially the same in all three cases. Each taxpayer operated a coal mine pursuant to a written lease; in exchange for a fixed royalty per ton, the lessor granted the lessee the right to extract coal and to sell it at prices determined by the lessee. Each lease contained a clause permitting the lessor to terminate the lease on 30 days' notice. In fact, however, none of the lessors exercised that right; each lessee mined a substantial tonnage of coal during an uninterrupted operation that continued for several years. The proceeds from the sale of the coal represented the only revenue from which the lessees recovered the royalties paid to the lessors.
App. 77a. The lease required Black Hawk to pay a royalty of 25 cents per ton of coal or ,000 per year, whichever was larger. Id. at 77a-78a. In addition, the lease required Black Hawk to pay all taxes on the underground coal, as well as the taxes on its plant and equipment and on mined coal. Id. at 79a. Black Hawk paid independent contractors a fixed price per ton to remove the coal, and Black Hawk was free to sell the coal to any party at whatever price it could obtain. Black Hawk mined the seam to exhaustion, operating continuously under the lease for 13 years. Id. at 70a-71a. The Government stipulated that Black Hawk was the sole claimant to the percentage depletion deduction; no claim had been made by the lessor or by any independent mining contractor employed by Black Hawk. Id. at 71a.
The Swank case involves two separate leases executed by Swank and Northumberland County, Pa., pursuant to which Swank operated mines on land owned by the county. The first lease, a deep-mining lease executed in 1964, was terminated in 1968 after a mountain slide forced Swank to close the mine. Id. at 52a. The second, a strip-mining lease executed in 1966, was still being operated by Swank's successor in interest in 1977 when the case was tried. During the tax years in dispute, Swank's royalty payments to the county at the rate of 35 cents per ton amounted to ,545.10 in 1966 and ,854.05 in 1967. Id. at 53a. The deduction for depletion, which was based on the gross income received from the sale of the coal, was significantly larger. [Footnote 3] The record also indicates that Swank invested significant sums in the construction
of access roads, the acquisition of equipment, and the purchase and improvement of a "tipple" -- the surface structure that is used to remove slate and rock from the mined product and to sort the coal into specific sizes for marketing. Id. at 55a-56a.
The Bull Run [Footnote 4] case involves a 5-year lease executed in 1967 and renewed in 1972. Id. at 90a-91a. Unlike the leases in the other cases, it gave the lessor a right of first purchase if it was willing to meet the lessee's price, and, in the tax year in dispute, the lessor did purchase all of the coal mined by Bull Run. 221 Ct.Cl. at 249, n. 4, 602 F.2d at 350, n. 4. The lease did not, however, limit the lessee's right to set selling prices or to sell to others who were willing to pay more than the lessor. Ibid. Like the lease in Black Hawk, the lease provided for a royalty of 25 cents per ton. App. 91a. As is also true in both Black Hawk and Swank, there is no suggestion that any other party has made any claim to any part of the percentage depletion allowance at issue in this case. [Footnote 5] See id. at 92a. The Bull Run lease, like the others, contained a provision giving the lessor the right to cancel on 30 days' written notice. [Footnote 6]
Commissioner v. Southwest Exploration Co., 350 U. S. 308, 312. [Footnote 7] The percentage depletion allowance however, is clearly more than a method of enabling the operator of a coal mine to recover the amount he has paid for the unmined coal. Because the deduction is computed as a percentage of his gross income from the mining operation, and is not computed with reference to the operator's investment, it provides a special incentive for engaging in this line of business that goes well beyond a purpose of merely allowing the owner of a wasting asset to recoup the capital invested in that asset. [Footnote 8] As the Court said in Southwest Exploration Co., supra:
350 U.S. at 312. [Footnote 9] Hence, eligibility for the deduction is determined not by the amount of the capital investment, but by the mine operator's "economic interest" in the coal. [Footnote 10]
A recognition that the percentage depletion allowance is more than merely a recovery of the cost of the unmined coal is especially significant in this case. The question here is
whether a deduction for the asset depleted by respondents will be received by anyone. [Footnote 11] The tax consequences of the lessors' receipt of royalties will not be affected, either favorably
or unfavorably, by our decision in this case. [Footnote 12] The Government...
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