dissenting: I must respectfully dissent despite the fact that I was what might be regarded as the progenitor of the Paragon Coal Co. case upon which the majority relies so heavily, having written the opinion of this Court in that case, the decision in which was affirmed by the Supreme Court in the cited reference. In my opinion this case is factually distinguishable from both the Paragon case and the Parsons case, and upon the facts of this case the taxpayers acquired an economic interest in the coal which entitles them to a deduction for percentage depletion under the law and the decided cases. The majority opinion does not really discuss the law as applied to the facts in this case but contents itself with rewriting or placing what I consider a strained interpretation on the terms of the written agreements between the parties so as to make this case factually similar to the Paragon case, and then concluding that the Paragon case is dis-positive of the issue in this case.
In. my opinion this result is accomplished only by ignoring a large part of the language used by the parties in their written agreements and ascribing to the parties relationships to the mineral to be mined that neither the terms of the agreements, the past history of the arrangements between the parties, nor anything in the record justifies.
The principal factors which I believe distinguish this case from the Paragon case are as follows. I will discuss them in the order discussed in the majority opinion where similar.
As in Paragon, petitioner here was not specifically required, nor given the right, to mine any area to exhaustion, but he was required to mine the area in a maimer consistent with good mining practices. This factor, often referred to in the depletion cases, but said not to be controlling in Justice Clark’s opinion in the Paragon case, might have different connotations in strip-mining operations than it has in deep-mining operations. However, unlike in Paragon, where the lessee gave the miners specific instructions on the directions in which they should mine and supervised their operations, here Jisco simply designated an area to be mined and gave petitioner no further instructions or supervision with respect to his operations.
In Paragon the miners paid no royalty to anyone for the coal mined. Here, unless the royalty specifically provided for in the agreement and accounted for on the vouchers as such is treated as a reduction in a fee paid to petitioner for mining the coal (which is nowhere mentioned in the agreements), as the majority has done, petitioner was required to pay 80 cents per ton for every ton of coal mined from the Jisco property. In my opinion this is a very important distinction in the two cases and should not be passed off by saying that it “was not a true royalty” but was “in substance no more than a reduction in the price which Jisco would pay where the coal delivered was mined from its own property” when there is nothing in the record to support such a conclusion.
The mere fact that for the years in question petitioner paid 30 cents per ton only on coal delivered to Jisco does not support the conclusion that this was not a true royalty. The arrangements between the parties clearly contemplated that Jisco would take :all of the coal mined by petitioner from this property if it needed it, and there is nothing to indicate that it did not need all of it. When petitioner originally obtained the lease on this property from the Bloods he agreed to pay a royalty of 30 cents per ton on all coal strip mined, and that royalty provision was simply carried over into this lease between Jisco, which by this time was the owner of the property, and petitioner. The evidence shows that petitioner mined coal from other properties under leases whereby he paid the owner a similar royalty and sold this coal to Jisco at the same price. We see no reason why the parties would engage in the elaborate process of providing for a royalty in the lease, and doing the accounting necessitated thereby, if the royalty was in fact only a reduction in a fee paid to petitioner to mine the coal, unless there was collusion between Jisco and petitioner to avoid taxes, and I find absolutely no evidence in the record to either indicate or support such a conclusion.
Here, unlike in Paragon, I am persuaded that Jisco actually surrendered, and intended to surrender, a capital interest in the coal in place to petitioner. Jisco apparently had no interest in the coal in place, except to control it as a source of supply, which it effectively did by having an option to purchase all the coal produced. Nor was Jisco interested in mining the coal itself. It could therefore safely sell a capital interest in the coal in place to petitioner without damaging its own interests, and that is what it did under the terms of the written agreement. Paragraph (1) of the agreement gave petitioner the right to mine and remove the coal from the property and paragraph (6) required petitioner to pay a royalty of 30 cents per ton for each and every ton of coal mined and removed from said premises. Paragraph (4) provided that petitioner should “sell” the coal produced to Jisco, and gave Jisco the option to “purchase” the coal not suitable for blast furnace use. Paragraph (5) referred to the “price to be paid for coal” delivered to Jisco. The terms of the written agreements clearly contemplate the arrangements in a typical coal lease where the lessee is given the exclusive right to go on the property and mine and remove the coal, in return for which he pays a tonnage royalty for the valuable right of removing and reducing the coal to possession. The only difference here is that under this agreement Jisco had the option to buy all the coal produced. I doubt that even this provision is unusual in modern day coal leases where so much of the coal produced is delivered to electric power companies under long-term contracts. In any event, it should not serve to limit or restrict the lessee’s capital or economic interest in the coal in place; nor should the fact that, under the circumstances existing, it was contemplated that petitioner would sell most, if not all, of the coal mined to Jisco.
Here, unlike in Paragon, the agreement was for a specified term— 5 years. The majority discounts this distinction between the cases by pointing to the provision permitting Jisco to terminate the lease upon 10 days’ notice in the event of the failure or inability of petitioner to produce coal for Jisco as contemplated by the lease. It appears to me that a careful reading of the entire paragraph (8), in which the above provision is contained, clearly contemplates a right to terminate only for cause, reasonably exercised, and I know of no cases which hold that the right of the lessor to terminate a lease for reasonable cause deprives the lessee of an economic interest in the property.
The majority opinion relies on the fact that because the price to be paid petitioner for the coal apparently remained unchanged for a period of 6 years, and petitioner offered no evidence that this price reflected market price, to infer that the price paid was not related to the market price. In my opinion such an inference is entirely unwarranted. Under the circumstances here present the market price of this particular coal in this particular area was not apt to fluctuate as does the price of coal sold on the open market. The price paid was agreed upon between unrelated parties in arm’s-length negotiations. The lease itself left the price open for negotiation. The amount paid under these circumstances is, in my opinion, the best evidence of market price and petitioners should not be called upon to produce any additional evidence.
In Paragon the Court pointed out that all of the miner’s investment was in movable, depreciable equipment, not in the coal in place. Here petitioner had an additional investment in the coal by virtue of his royalty payments. In Paragon the coal, even after it was mined, did not belong to the miners, they could not sell it to anyone else or keep any of it, they were not entitled to any part of the proceeds of the sale of the coal, and they were required to look only to Paragon Coal Co. for all sums to become due them under their contracts. Here, if I interpret the agreement correctly, the coal belonged to petitioner after it was removed, with Jisco having the option to purchase it, petitioner could sell any coal not taken by Jisco on the open mai’ket, or could use it himself, petitioner received all of the proceeds from the only sale of the coal which was made, because Jisco used it and did not resell it, and while petitioner apparently did receive all sums he received from the removal and sale of this coal from Jisco during the years here involved, he was not required to look only to Jisco for a return of his investment under the terms of the agreement.
For the above principal reasons I think this case is factually different from the Paragon and Parsons cases and should not necessarily be controlled by those cases. Of course, I realize that just because the facts in this case are different from those in Paragon and Parsons this would not automatically entitle petitioner to a deduction for percentage depletion. However, I believe that the facts in this case, as discussed above, bring it within the principles of law enunciated in the opinions in those two cases and the numerous other cases cited therein, and in fact with the principles of law enunciated in the majority opinion in this case, which allow the lessee-miner a deduction for percentage depletion. I do believe that I have demonstrated in my discussion above that the factors relied upon in Parsons and Paragon to deny the miners the depletion deduction there are not present in this ease.
It Is not so much disagreement as to the basic principles of law as it is in the application of those principles to a given factual situation which causes the confusion and uncertainty in the percentage depletion area. I agree with the majority opinion’s statement of the purpose for the allowance of a deduction for depletion and its statement of the basic requirements of the law for the allowance of the deduction.
The depletion deduction is allowable only to the owner of an economic interest in the mineral deposit and such an economic interest is possessed by a taxpayer who has acquired by investment any interest in the mineral in place and secures, by any form of legal relationship, income derived from extraction of the mineral to which he must look for a return of his capital; and a contractual arrangement which gives the taxpayer only an economic advantage derived from production is not enough. Sec. 1.611-1 (b) (1), Income Tax Regs. Legal title to the mineral deposit is not required and a lessee who has the exclusive possession of the deposits and the valuable right of removing and reducing the mineral to possession has a substantial interest therein, Lynch v. Alworth-Stevens Co., 267 U.S. 364 (1925); such title as might be required for the depletion deduction would appear to vest in him not later than when the mineral is mined. The form of the instrument under which the taxpayer derives this interest is not significant ; this interest may be acquired through the payment of royalties or other investments in the property, and the cost of the investment is unimportant. Burton-Sutton Oil Co. v. Commissioner, 328 U.S. 25 (1946). This interest is property within the meaning of the depletion statutes, Lynch, v. Alworth-Stevens Co., supra, and if the lessee must look to the mining and sale of the mineral for the recovery of his investment and his “possibility of profit” he is entitled to a deduction for depletion against his gross income from mining.
Prior to the effective date of the present section 631 (c), if the owner-lessor of the mineral property retained an economic interest in the mineral under the terms of the lease agreement, the depletion deduction was equitably apportioned between the lessor and lessee. With respect to percentage depletion this apportionment was effectuated by requiring the lessee to deduct from his gross income from the property, before applying the depletion rate, all rents and royalties he was required to pay for the use of the property; the lessor using the royalty income as his share of the income from the property against which he deducted depletion. Under section 631 (c) the owner-lessor is not allowed to deduct percentage depletion but may treat the royalties received as income from the sale of a capital asset, deducting from the royalty income a proportionate part of his investment in the property in computing his profit. This does not, however, serve to change the lessee’s right to compute depletion only on his proportionate share of the income from the property, i.e., after reduction by the royalties paid. See Paragon Coal Co. v. Commissioner, 380 U.S. 624 (1965).
For the reasons stated above, I think that under the terms of the controlling instruments in this case petitioner meets all the requirements of the law for the allowance of a percentage depletion deduction; and I find nothing in the record to justify refusing to accept those documents at face value. I think the parties intended to and did give petitioner an economic interest in the coal in place, which he acquired by investment, that petitioner’s interest was depleted as the coal was removed, and that petitioner had to look to the production and sale of the coal to recover that investment. This should entitle petitioner to the depletion deduction.
If the majority opinion is intended to stand for the proposition that simply because a lessee grants to the owner-lessor an option to purchase all of the mineral produced under the lease, the lessee acquires no depletable economic interest in the coal, I also disagree with it on that score.
FORRESTER, Scott, Dawson, and Tannenwald, JJ., agree with this dissent.