Huss v. Smith

255 F.2d 599, 1 A.F.T.R.2d (RIA) 1264

• Court: Court of Appeals for the Third Circuit
• Decided: March 27, 1958
• Docket: Nos. 12315, 12317, 12319
• Status: Published

Opinions

HASTIE, Circuit. Judge.

These appeals, like those we have decided today in Parsons v. Smith, 255 F.2d 595, challenge a district court ruling that a contracting firm which extracted coal from the land .of another by strip mining was not entitled to claim a percentage depletion allowance in computing its income from that mining operation. Therefore, we will not repeat such of our discussion in Parsons v. Smith as presents legal conceptions common to all cases of this type. However, the .controversies involve different arrangements between different parties concerning different tracts. And circumstances peculiar to a particular stripping arrangement may be decisive for or against the claimed depletion deduction. Therefore it is necessary to consider separately and in some detail the facts upon which the stripper relies in this case.

The present contractor, a partnership which we shall call Huss, entered into a written agreement with the Philadelphia and Reading Coal and Iron Co., hereinafter called Reading, concerning the strip, mining of certain coal lands owned by Reading. For this work Huss was to be paid an agreed dollar amount per ton of usable ore it should extract and deliver to a colliery designated by Reading. The agreed price was described in the contract as “full compensation for the full performance of all work and for the furnishing of all material, labor, power, tools, machinery, implements and equipment required for the work”. The provisions of this contract which relate to. compensation are certainly no more fá-vorable to the taxpayers’ depletion claim than were the rather similar provisions in the Parsons case. In neither case does anything agreed or done about compensation suggest that the stripper acquired] an interest in the mineral in place.

On the other hand the facts relating to the duration of the stripping agreement in this case are somewhat different, from those in the Parsons case. Huss continued to mine the contract area until the parties mutually agreed that additional stripping would not be profitable. In this sense Huss did mine the deposit to exhaustion. However, the stripping contract expressly provided that Reading could cancel the agreement, terminating it unconditionally and without liability, on thirty days notice in writing. We are not told the reason for including this cancellation clause. We know only that it was part of the contract and that it was not invoked during the course of the mining operation under the contract.

In these circumstances there is more basis for argument here than there was in the Parsons case that the bargain contemplated such extensive mining of the area as would warrant characterization of the stripper’s status as involving an interest in the mineral in place. Indeed, certain recent decisions of the Court of Appeals for the Fourth Circuit suggest the reasonableness of such an analysis on facts not very different from those here. See Commissioner of Internal Revenue v. Hamill Coal Corp., 4 Cir., 1956, 239 F.2d 347; Weirton Ice & Coal Supply Co. v. Commissioner of Internal Revenue, 4 Cir., 1956, 231 F.2d 531. But to us the most that can be said for the stripper’s position on the present record is that reasonable men can differ on the inferences they draw from the facts and in the relative values they attribute to various facts in determining the category in which the total situation belongs. Indeed, this contract did not give the stripper the privilege of mining all uncovered coal after notice of termination, which in the Parsons case was thought to strengthen the stripper’s claim to an interest in the mineral in place. Certainly a reasonable trial judge could view the absolute right of termination on thirty days notice as more significant than the fact that this privilege was not exercised in the given case. And this in substance Is what the trial judge did. We cannot find reversible error in this evaluation of the evidence' in relation to the rather vague standard the courts must administer in these cases.

Finally, we note that Huss invested a ■considerably larger sum than did the plaintiffs in the Parsons case in drilling and earth moving equipment. At one time Huss committed about $500,000 worth of equipment to this job. However, the district court found that, except for one item, all of this equipment had utility for stripping operations in general rather than special adaptation to this project. Nothing appears which distinguishes such expenditures from capital expenditures normally made by independent contractors who undertake large projects in such familiar fields as road building and general construction.

We are satisfied that the conclusion of the district court was consistent with the rational application of the legal standards stated in the statute and the implementing Treasury Regulations to the facts at hand. That is enough to require affirmance.

A separate issue is raised on this appeal with reference to so much of the judgment below as denied appellants any depletion allowance for strip mining prior to December 31, 1944 under certain other agreements called the “Stevens contracts”. This ruling was explicitly based upon the trial court’s conclusion that the taxpayers, who as plaintiffs below had the burden of proof, had failed to establish the existence prior to 1945 of such an agreement as would support a depletion allowance. We have examined the evidence on this branch of the case. It is not so clear and convincing as necessarily to persuade any reasonable trier of fact. We must, therefore, sustain the trial court’s finding against the appellants on the facts.

The judgment will be affirmed.