*41 Decisions will be entered under Rule 50.
1. The holder of mining rights acquired by lease entered into a contract with a coal strip-mining contractor whereby the latter agreed to strip-mine all strippable coal on the property. The contract gave the stripper the exclusive right to strip-mine the coal and required it to perform certain duties which had been imposed upon the holder of the mining rights by the terms of its leases. In consideration the coal stripper was to receive 83 per cent of the net selling price of the coal it mined. Held, that by contract the holder of the mining rights transferred to the coal stripper a depletable interest in the coal in place and accordingly the receipt by the coal stripper of 83 per cent of the net selling price of the coal is income subject to percentage depletion allowed by virtue of sections 23 (m) and 114 (b) of the Internal Revenue Code.
2. Partners who had acquired by leases certain rights to strip-mine coal assigned the leases to a corporation which they formed, and thereafter the corporation performed the coal stripping operation. Prior to assignment the lessor had not consented in writing to the assignment as required by the*42 terms of the leases; however, the lessor was aware of the assignment and at all times thereafter transacted its business concerning the coal mining operations with the corporation. Held, that by assignment the corporation acquired a depletable interest in the coal in place and the lessor consented to this assignment and waived the requirement of the leases that a written consent be first had.
*285 The respondent determined income tax deficiencies against the petitioners as follows:
| 1947 | ||
| Deficiency | Penalty | |
| James Ruston | $ 13,031.65 | $ 651.58 |
| James Ruston & Audrey S. Ruston | ||
| E. W. Ruston | 3,823.98 | |
| Dorothy M. Ruston | 4,228.81 | |
| E. W. Ruston & Dorothy M. Ruston |
| 1948 | ||
| Deficiency | Penalty | |
| James Ruston | ||
| James Ruston & Audrey S. Ruston | $ 24,680.18 | $ 1,234.01 |
| E. W. Ruston | ||
| Dorothy M. Ruston | ||
| E. W. Ruston & Dorothy M. Ruston | 19,206.82 |
| 1949 | ||
| Deficiency | Penalty | |
| James Ruston | ||
| James Ruston & Audrey S. Ruston | $ 19,267.49 | $ 963.36 |
| E. W. Ruston | ||
| Dorothy M. Ruston | ||
| E. W. Ruston & Dorothy M. Ruston | 19,093.41 |
| W. A. Wilson & Sons Construction Co., Inc. | ||
| Income | Section 102 | |
| Tax | surtax | |
| Aug. 1, 1946-June 30, 1947 | $ 57,723.58 | |
| July 1, 1947-June 30, 1948 | 11,530.09 | |
| July 1, 1948-June 30, 1949 | 23,969.50 | $ 48,876.41 |
Petitioner W. A. Wilson & Sons Construction Co., Inc., although specifically not so stating, claimed in its petition that it has made substantial overpayments of income tax for each of the taxable periods involved.
*286 The above-named members of the Ruston family, petitioners herein, and the respondent have entered into a written stipulation with respect to several of the issues properly raised in the petitions as error, and this stipulation will be given effect upon recomputation of the tax liability of these parties under Rule 50 of the Rules of Practice before The Tax Court of the United States.
At the hearing before us the attorneys for the petitioner, W. A. Wilson & Sons Construction Co., Inc., and the respondent orally informed this Court that the parties had stipulated with respect to certain issues properly raised by the petition as error. Such stipulation will also be given effect upon recomputation of any tax liability of this petitioner under Rule*44 50 of the Rules of Practice before The Tax Court of the United States.
There remains for us to decide two issues. One of these issues is common to all the named members of the Ruston family, petitioners herein, and to the petitioner W. A. Wilson & Sons Construction Co., Inc. The petitions of the Ruston family, Docket Nos. 32576, 32577, 33587, 33588, and 33589, and the petitioner W. A. Wilson & Sons Construction Co., Inc., Docket No. 36018, were consolidated for hearing with respect to such common issue, which is as follows: Did the partnership, owned and operated by the Ruston family, holders of strip-mining rights, transfer to the petitioner W. A. Wilson & Sons Construction Co., Inc., a depletable interest in the coal by virtue of a contract it had with W. A. Wilson & Sons Construction Co., Inc., whereby the latter performed strip-mining operations?
The second issue concerns only the tax liability of petitioner W. A. Wilson & Sons Construction Co., Inc., for the taxable periods here involved. Accordingly, this issue was heard by this Court separately but immediately following the hearing with respect to the issue common to all the petitioners. This second issue concerns the question*45 whether two partners who held certain mining leases validly assigned these leases to a corporation which they formed, the petitioner W. A. Wilson & Sons Construction Co., Inc., or whether the corporation merely performed services for the partnership.
Such of our findings of fact as relate only to the separate issues will be numbered and set out separately, and a like division will be made in our opinion.
FINDINGS OF FACT.
A written stipulation of facts was entered into by and between the respondent and members of the Ruston family, petitioners herein. We find these facts as stipulated.
The petitioners James Ruston and Audrey S. Ruston at all times material herein have been husband and wife, and they reside at Glasgow, West Virginia. For all taxable periods here involved they filed *287 their income tax returns with the collector of internal revenue for the district of West Virginia on the calendar year cash basis.
The petitioners E. W. Ruston and Dorothy M. Ruston at all times material herein have been husband and wife. They reside at Phoenix, Arizona, and for all the years here involved filed their income tax returns with the collector of internal revenue for the district*46 of Arizona on the calendar year cash basis. E. W. Ruston is the son of James Ruston.
The information returns of the partnership, owned and operated by petitioners James Ruston and E. W. Ruston and called the Nuri Smokeless Coal Company, for the fiscal years ended March 31, 1947, 1948, and 1949, respectively, were duly filed with the collector of internal revenue for the district of West Virginia. These returns were reported on the accrual basis.
The petitioner, W. A. Wilson & Sons Construction Co., Inc., formerly Wilson-Ingram Construction Company (the name of the corporation was changed in 1948), is a corporation organized and existing under the laws of the State of West Virginia, with its principal place of business at St. Marys, West Virginia. It filed its income tax returns on the cash basis for the taxable periods here involved with the collector of internal revenue for the district of West Virginia.
Facts With Respect to Issue No. 1.
In the year 1942 the petitioner, James Ruston, with another party, C. B. Tackett, prospected and discovered a seam of coal on a mountainous terrain in Fayette County, West Virginia. Desiring to mine this coal, they obtained from the owners*47 of the land leases which permitted them to perform both strip and deep mining of coal. They also leased land on a rail siding of the Chesapeake & Ohio Railroad Company, together with improvements thereon, including a coal tipple, coal screens and railroad siding, and acquired such rights-of-way as were necessary to transport coal from the site of operations to the coal tipple. Having thus acquired these leasehold interests in the property they thereupon on November 6, 1942, formed a partnership called the Nuri Smokeless Coal Company, whose purpose was the development of the leased property for mining purposes and the mining of coal therefrom.
The mining leases, which were renewable for 10-year periods, provided, among other things, that the lessees were to have the exclusive right to mine coal, plus the right to transport over the property covered by each lease coal mined from adjacent property. No present consideration passed but the lessees were required to pay certain royalties for each ton of coal mined, with a fixed yearly minimum royalty.
*288 There were a number of important duties the lessees undertook to perform. They were required to pay a certain fixed wheelage*48 charge per ton for all coal transported over the property covered by each lease. They were required to insure the premises against fire, pay all property taxes and, in view of the "unusually small and minimum royalty," diligently and continuously to mine coal. They were required to keep in repair and working condition at their own expense equipment and improvements on the property.
For the lessees' failure to comply with the conditions of the leases or for failure in payment of any rents, royalties or transportation charges, the lessor(s) of each lease retained the right to terminate the lease, provided the lessees were in default for 3 months. Each lease also provided that should the lessees cease to work and mine the coal for a certain period of time (3 months in one lease and 6 months in the others), except for causes beyond their control, such failure should at the election of the lessor work a forfeiture of the lease. 2
The provisions of*49 the leases gave the lessees the right of surrendering the leasehold premises upon 90 days' notice in writing, such writing being conditioned upon the lessees having performed all their obligations under the leases. Two of the three mining leases gave the lessees deep mining as well as strip-mining rights. The lease of the property at the railroad siding, or the tipple lease, provided for monthly rental payments of $ 25, plus royalties, and this lease had other provisions similar to those of the mining leases.
All of the leases were part of the capital invested by the partners in their business, and the partnership, in accordance with the terms of the leases, immediately proceeded with the development of the properties for coal mining purposes and commenced to strip-mine coal.
In April 1943 the original partnership between C. B. Tackett and petitioner James Ruston was dissolved. Tackett's interest was purchased by petitioner E. W. Ruston and a new partnership was formed, which retained the original name, Nuri Smokeless Coal Company. The purpose of the new partnership was the same as that of the original partnership, namely, to develop property for mining purposes and to strip-mine*50 the coal. C. B. Tackett transferred his interest in the leases to E. W. Ruston.
The new partnership continued the development work commenced by the predecessor partnership. It also actually strip-mined coal, at times performing the mining operations itself and at other times contracting its work out to stripper-contractors. The coal produced was sold under the name of Nuri Smokeless Coal and there was attached to this name considerable good will inasmuch as the coal was of a high quality. Prior to contracting with the petitioner, W. A. Wilson *289 & Sons Construction Co., the Nuri Smokeless Coal Company had had some difficulties with its contractors due to the fact that they were shipping out a considerable quantity of foreign matter in the coal produced. In June 1946 the Nuri Smokeless Coal Company entered into a contract with the W. A. Wilson & Sons partnership, wherein the latter agreed to strip-mine coal on the premises leased by the Ruston partners. At that time the partners of Wilson & Sons contemplated incorporating and they did in fact incorporate the petitioner herein, W. A. Wilson & Sons Construction Co. on or about August 1, 1946, and on that date assigned the*51 contract to this petitioner.
In accordance with the contract the petitioner, W. A. Wilson & Sons Construction Co., hereinafter usually referred to as the contractor, agreed to strip, remove, and load out all of the mineable and merchantable Sewell coal on the land leased to the partners E. W. Ruston and James Ruston under the mining leases referred to above. The contractor was to furnish at its own cost and expense all materials, tools, machinery, equipment, and labor, to build all necessary roads, to make all necessary improvements incident to its operations in removing, stripping and excavating coal, and to maintain and keep in proper repair and working order the tipple, screens, loading ramps, sidings, etc., on the property, and to screen, produce, load, process, clean, and ship the coal at its own expense.
While the leases were not transferred, the Nuri Smokeless Coal Company granted to the contractor the sole and exclusive right to use and occupy the leaseholds for the purposes of stripping, loading, and shipping the coal and agreed not to engage in any stripping operations on the leaseholds during the term of the contract, nor to grant any other person, firm, or corporation*52 any right or privilege to remove coal from the leaseholds during the term of the contract.
In view of the fact that the leases required that coal should be continuously removed from the leaseholds and that the mining should be carried on without interruption or delay, the contractor covenanted and agreed that it would operate continuously and prosecute the work of stripping, removing, and loading the coal without interruption or delay. In keeping with this clause the contract further provided that in the event that the contractor failed vigorously and continuously to prosecute the operations for a period of 15 consecutive days for reasons not beyond its control or in the event it should in any other manner breach the terms of the contract and fail to perform the duties thereunder, then the Nuri Smokeless Coal Company, upon giving written notice to the contractor by registered mail, should have the right and privilege immediately to cancel the agreement and forthwith *290 take possession of any portion of the leaseholds then being occupied by the contractor. The contractor in turn had the right to cancel and surrender the contract by giving the Nuri Smokeless Coal Company 30*53 days' notice by registered mail, after which time the contractor was to be released from further liability and the agreement terminated. The contractor agreed to carry fire insurance on the equipment, machinery, and appliances owned by the Nuri Smokeless Coal Company and located in and about the tipple, to carry workmen's compensation on all of its employees engaged in the prosecution of the operations, and to carry public liability and property damages insurance on the operations. The contract further provided that the coal was to be sold as Nuri Smokeless Coal and was to belong to the Nuri Smokeless Coal Company when and as mined, subject to the right of the contractor as contained in the agreement. That right was set out in the following provisions with respect to division of the proceeds from the sale of the coal:
12. Payments shall be made by parties of the first part [Nuri Smokeless Coal Company] to parties of the second part [contractor] on or before the 25th day of each month for all coal for which the parties of the first part have received the railroad waybills for the coal shipped by the parties of the second part during the previous month.
* * * *
20. The parties of*54 the first part shall have the sole and exclusive right and privilege to sell the coal produced by the parties of the second part under the terms of this contract. The interest of the parties of the second part in coal produced and shipped shall be 83 per cent of the net selling price of said coal as received by the parties of the first part after the selling commission of ($ 0.15) fifteen cents has been subtracted from the gross selling price, said selling price to be based on 2,000 pounds per ton weight, and said parties of the first part, hereby covenants [sic] and agree to write an order and deliver same to the consignee and, or consignees to whom coal is sold, from time to time, authorizing and directing said consignee to make payment of (83) eighty-three per cent of the net selling price of said coal, directly to said parties of the second part, said payments to be made on the 25th day of each month for all of the coal mined and removed during the previous month.
Both the Nuri Smokeless Coal Company and the contractor, thereafter and at all times during the taxable periods here involved, operated in accordance with the terms of the contract. The contractor performed the*55 actual mining operations and the Nuri Smokeless Coal Company handled certain financial transactions involved in the sale of the coal and the payment of taxes and royalties as was required by the terms of the leases. In actual practice the selling agent forwarded directly to the contractor his share of the net sales price of the coal.
The petitioners, E. W. Ruston and James Ruston, operating a partnership under the name of the Nuri Smokeless Coal Company, by their *291 contract with petitioner W. A. Wilson & Sons Construction Co., Inc., the contractor, transferred to the latter a depletable interest in the coal in place, and the receipt during the taxable periods here in question by the petitioner, W. A. Wilson & Sons Construction Co. of 83 per cent of the net sales price of the coal produced constituted income from the severance and sale of coal, a depletable asset.
Facts With Respect to Issue No. 2By two leases originally entered into in 1942 and renewed in 1946 by and between W. A. Wilson & Sons, a partnership and predecessor of the petitioner W. A. Wilson & Sons Construction Co., Inc., as lessees, and the Pittsburgh Consolidation Coal Company, as lessor, the parties *56 agreed that the partnership should sublet the Pittsburgh Consolidation Coal Company's coal mining leases for the production of coal. When the petitioner was formed on August 1, 1946, it took over the mining operations under these leases, and on February 2, 1947, the partnership assigned to the corporation all of its interest in the Pittsburgh Consolidation Coal Company's leases and it was determined that the assignment should be retroactively effective as of August 1, 1946. It was provided in each of the leases in question that the leases should not be sublet, underlet, or assigned by the partnership without the prior written consent of the lessor, Pittsburgh Consolidation Coal Company. The partnership did not obtain this written consent prior to assignment of the leasehold interests; however, the conduct between the corporation and the Pittsburgh Consolidation Coal Company was such as to indicate that the Pittsburgh Consolidation Coal Company assented to this agreement.
The petitioner, W. A. Wilson & Sons Construction Co., obtained from its predecessor partnership, W. A. Wilson & Sons Company, a depletable interest in coal in place represented by the Pittsburgh Consolidation Coal*57 Company's leases, and the income received during the periods here in question from the sale of such coal was accordingly subject to a depletion allowance.
OPINION.
Issue No. 1.
This issue concerns the question whether the Nuri Smokeless Coal Company, a partnership owned and operated by petitioners James Ruston and E. W. Ruston, when it entered into a contract with petitioner W. A. Wilson & Sons Construction Co., Inc., whereby the latter was to strip-mine coal from the Rustons' leased property, transferred to W. A. Wilson & Sons Construction Co. a *292 depletable interest in the coal. Applicable statutory law is contained in sections 23 (m) and 114 (b) (4) of the Internal Revenue Code. 3 This language is necessarily very broad and in situations where several taxpayers are involved the issue as to who is entitled to such a deduction is one for judicial determination. Such an issue was first raised in cases where the owner of land or the holder of mining or drilling leases transferred the mining or drilling rights to another, retaining only the right to royalty or bonus payments and the like.
*58 In holding that the recipient of the royalty payments was entitled to deduction for depletion, the Supreme Court in the leading case of Palmer v. Bender, 287 U.S. 551">287 U.S. 551, stated that the statutory language allowing the depletion deduction was sufficiently broad to provide at least for every case in which the taxpayer acquired by investment any interest in the oil (ore, coal, etc.) in place and secured by any form of legal relationship income derived from the extraction of the depletable asset to which he must look for the return of his capital. In both Palmer v. Bender, supra, and Lynch v. Alworth-Stephens Co., 267 U.S. 364">267 U.S. 364, which involved a similar problem under earlier law, the Supreme Court held that the allowance for depletion is not dependent upon the particular legal form of the taxpayer's interest in the property to be depleted, and that the particular legal relationship of the parties was unimportant. In holding that the recipient of royalties *293 was entitled to the deduction, the Supreme Court in Lynch v. Alworth-Stephens Co., supra,*59 stated:
It is, of course, true that the leases here under review did not convey title to the unextracted ore deposits [citing cases]; but it is equally true that such leases, conferring upon the lessee the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership, created a very real and substantial interest therein. [Citing cases] And there can be no doubt that such an interest is property. [Citing cases]
* * * *
* * * Obviously, as the process [mining] goes on, this property interest of the lessee in the mines is lessened from year to year, as the owner's property interest in the same mines is likewise lessened. There is an exhaustion of property in the one case as in the other; and the extent of it, with the consequent deduction to be made, in each case is to be arrived at in the same way, * * *.
In Palmer v. Bender, supra, the court emphasized that the important consideration is that the taxpayer by his lease acquired the control of a valuable economic interest in the ore capable of realization as gross income by the exercise of his mining rights under the lease.
In Kirby Petroleum Co. v. Commissioner, 326 U.S. 599">326 U.S. 599,*60 where it was held that the taxpayer-lessor, who retained the right to 20 per cent of the net money profits realized by the operators of the oil properties, was entitled to an allowance for depletion, the Supreme Court stated that only a taxpayer with an economic interest in a depletable asset is entitled to the depletion allowance, and added that by this (economic interest in the asset) was meant only that under the taxpayer's contract he was required to look to the oil in place as the source of return of his capital investment, the technical title to the oil in place being unimportant.
Burton-Sutton Oil Co. v. Commissioner, 328 U.S. 25">328 U.S. 25, concerned the question whether an operator of an oil lease should exclude from its gross income for depletion purposes certain payments it made to the person who granted it the oil rights. The Supreme Court stated:
In the present case, the assignor of the petitioner before assignment had an economic interest in the oil in place through its control over extraction. Under the contract with petitioner, its assignor retained a part of this interest -- fifty per cent of net. Like the other holders of such economic *61 interest through royalties, the petitioner looked to the special depletion allowances of Section 114 (b) (3) to return whatever capital investment it had. The cost of that investment to the beneficiary of the depletion under Section 114 (b) (3) is unimportant. Depletion depends only upon production. It is the lessor's, lessee's or transferee's "possibility of profit" from the use of his rights over production, "dependent solely upon the extraction and sale of the oil," which marks an economic interest in the oil. * * *
The courts have held that the capital investment or economic interest embodied in such a right is not dependent upon legal title 4*62 and *294 the holder thereof may make a transfer completely divesting himself thereof 5 or he may contract away only a part of his interest therein. 6
In the earlier cases which established the economic interest principle, the usual situation presented to the courts was one where the holder of the lease which granted the mining or drilling rights, by contract, transferred such rights to another, retaining the right to royalties and like payments dependent upon production, and the courts were usually called upon to decide the question whether the holder of the royalty and like payments dependent upon production retained a capital investment in the oil, gas, ore, coal, etc., in place. Other cases have since arisen where the question presented was whether the person performing the mining or drilling*63 operations had in fact acquired all or any part of the economic interest in the wasting asset or whether such an operator was merely a "hireling," a person employed to perform services for the holder of the mining and drilling rights. Cf. Spalding v. United States, 97 F. 2d 697; North Range Mining Co., 46 B. T. A. 296; Caroline C. Spalding, 35 B. T. A. 132; Eastern Coal Corporation v. Yoke, 67 F. Supp. 166">67 F. Supp. 166; Haddock Mining Co. v. United States, 92 F. Supp. 106">92 F. Supp. 106. While in these cases it was held that the operator had a depletable interest in the wasting asset, the decision in each case was made dependent upon the facts of that case, and it would certainly appear that the contractor who is hired merely to perform services for his employer enjoys no more than an economic advantage derived from production. Cf. Helvering v. Bankline Oil Co., 303 U.S. 362">303 U.S. 362; Helvering v. O'Donnell, 303 U.S. 370">303 U.S. 370. See also Cresson Consolidated Gold Mining & Milling Co., 192">11 T. C. 192.*64
The cases which we have cited in the preceding paragraph, as well as other pertinent cases, have been cited in the parties' briefs and thoroughly discussed therein and we believe that no purpose would be served in any detailed discussion of them here or in a showing how the facts of each may be distinguished from one another or from the case before us. Suffice it to say that the issue before us requires to be done what was done in the cited cases, namely, to determine from the entire record whether there was in fact transferred to the contractor, W. A. Wilson & Sons Construction Co., an economic interest in the coal. In this respect we believe that the tests set out in GCM 26290, 1950-1 C. B. 42, relied upon by the respondent, can not be considered as conclusive with respect to a coal stripper's right to a depletion deduction; however, this memorandum does set out the pertinent factors *295 to be considered in arriving at such a conclusion and it is therefore a helpful, if not controlling, guide.
From our consideration of the entire record before us, the contract between the parties, the testimony of the parties at the hearing and other*65 pertinent documentary evidence, we are convinced and have found as a fact that the Nuri Smokeless Coal Company, owned and operated by the petitioners James Ruston and E. W. Ruston, transferred to petitioner W. A. Wilson & Sons Construction Co. an economic interest in the coal in place, thereby entitling the W. A. Wilson & Sons Construction Co. to percentage depletion on their gross income from the severance and sale of coal. We are also convinced by the record that during all the taxable periods here involved the parties both participated in different but essential phases in the production of coal.
The contract between the parties, with which they in fact complied during the taxable periods here in question, although not providing for the transfer of the leases, gave the contractor sole and exclusive right to strip coal from the mining premises until the seam should be exhausted. As consideration the contractor was to receive 83 per cent of the net selling price of the coal after deduction of a selling commission of 15 cents per ton. The contractor was obliged to furnish at its own cost and expense all materials, tools, machinery, equipment, and labor, to build all necessary roads, *66 to make all necessary improvements incident to its operations in removing, stripping, and excavating coal, and to maintain and keep in proper repair and working order the tipple, screens, loading ramps, sidings, etc., on the property, and to screen, produce, load, process, clean, and ship the coal at its own expense.
The Nuri Smokeless Coal Company could cancel the agreement only in the event that the contractor should fail vigorously and continuously to prosecute the operations for a period of 15 consecutive days for reasons not beyond its control, or in the event that it should in any other manner breach the terms of the contract and fail to perform the duties thereunder. The contractor agreed to carry fire insurance on the equipment, machinery and appliances owned by the Nuri Smokeless Coal Company and located in and about the tipple, to carry workmen's compensation on all of its employees engaged in the prosecution of the operations, and to carry public liability and property damages insurance on the operations. The contract provided that the contractor had the right to cancel its contract by giving the Nuri Smokeless Coal Company 30 days' notice.
The Nuri Smokeless Coal Company*67 retained the right to sell the coal through its agent and under the trade name of Nuri Smokeless Coal, and during the periods here involved the coal was in fact sold *296 through the selling agent of the partnership under this trade name. The partners continued to perform those other duties they had undertaken by virtue of their lease which they had not specifically delegated to the contractor, such as the payment of various taxes on the property and the payment of royalties to the lessors.
With respect to the income from the operations, the record appears to show that both parties, Nuri Smokeless Coal Company and W. A. Wilson & Sons Construction Co., looked only to the sale of coal for their income, and we believe that this is the only reasonable interpretation which could be placed upon the terms of their contract. Furthermore, the parties themselves seem to have placed this interpretation on the contract as is evidenced by the manner in which they operated with respect to the division of income from the sale of coal. We accordingly believe that the position taken by the petitioners, the Ruston group, namely, that W. A. Wilson & Sons Construction Co. was to be paid every*68 month for coal shipped, regardless of whether or not it was sold, is untenable and is not supported by the record. No mention is made anywhere in the contract that the W. A. Wilson & Sons Construction Co. was so entitled or was ever entitled to any minimum payment whatsoever for coal mined. In this respect neither the fact that advances were made by the selling agent of the Nuri Smokeless Coal Company to W. A. Wilson & Sons Construction Co., nor the manner in which such payments were entered upon the books of the selling agent is material. Such advances are usual in commercial transactions where sellers are operating "close to the belt." Nor do we believe that the fact that legal title to the coal when severed was in the Nuri Smokeless Coal Company is controlling, since it appears implicit in the agreement that the Nuri Smokeless Coal Company would sell the coal at the best available market price and the contract required the Nuri Smokeless Coal Company to then pay over to the contractor 83 per cent of the net selling price of the coal. 7 Granting that a purpose with respect to the division of the sales proceeds may very well have been to make the contractor share the burden *69 of any sales allowance or adjustment for coal which when inspected by the buyer contained an excessive amount of foreign matter; nonetheless, by admitting this very purpose, we believe that the Ruston petitioners have admitted that they required the contractor by such a provision to take risks as to what the ultimate selling price would be.
From a consideration of the foregoing factors, we believe that the conclusion is inescapable that the contractor here, W. A. Wilson & *297 Sons Construction Co., held*70 an economic interest in the coal in place, and since its income, the 83 per cent of the net selling price of the coal, was from the severance and sale of the coal, such income is subject to the percentage depletion allowed by the Internal Revenue Code.
Issue No. 2.
The second issue concerns the question whether or not the petitioner corporation, W. A. Wilson & Sons Construction Co., Inc., ever acquired an economic interest in certain leases which its predecessor partnership, W. A. Wilson & Sons, had held.
The respondent makes no objection to the requested finding of fact that the partnership, W. A. Wilson & Sons, assigned to the W. A. Wilson & Sons Construction Co. its leases on February 2, 1947, effective August 1, 1946. His position is merely that this assignment was ineffective because the partnership failed to first obtain the written consent of the Pittsburgh Consolidation Coal Company, the lessor, as was required by the terms of the leases which the partnership had with this company. We believe that this is a somewhat technical argument on the part of the respondent, but in any event it appears that the petitioner, W. A. Wilson & Sons Construction Co., Inc., has introduced*71 sufficient evidence to establish that the conduct of the Pittsburgh Consolidation Coal Company was, after the assignment, such as to establish that it in fact consented to the assignment, thereby in effect waiving the provision for written consent. Accordingly, we hold in favor of the petitioner, W. A. Wilson & Sons Construction Co., Inc., on this issue.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: James Ruston and Audrey S. Ruston, Docket No. 32577; E. W. Ruston, Docket No. 33587; Dorothy M. Ruston, Docket No. 33588; E. W. Ruston and Dorothy M. Ruston, Docket No. 33589; W. A. Wilson and Sons Construction Co., Inc., Formerly Wilson-Ingram Construction Company, Docket No. 36018.↩
2. This condition was waived later with respect to one of the leases.↩
3. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(m) Depletion. -- In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * * In the case of leases the deductions shall be equitably apportioned between the lessor and lessee. * * *
For percentage depletion allowable under this subsection, see section 114 (b), * * * (4).
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
(b) Basis for Depletion. --
* * * *
(4) Percentage depletion for coal * * *. --
(A) In General. -- The allowance for depletion under section 23 (m) shall be, in the case of coal mines, 5 per centum, * * * of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, * * *.
(B) Definition of Gross Income From Property. -- As used in this paragraph the term "gross income from the property" means the gross income from mining. The term "mining," as used herein, shall be considered to include not merely the extraction of the ores or minerals from the ground but also the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products. The term "ordinary treatment processes," as used herein, shall include the following: (i) In the case of coal -- cleaning, breaking, sizing, and loading for shipment; * * *.↩
4. Palmer v. Bender, supra;Lynch v. Alworth-Stephens Co., supra;Burton-Sutton Oil Co. v. Commissioner, supra;Thomas v. Perkins, 301 U.S. 655">301 U.S. 655; Burnet v. Harmel, 287 U.S. 103↩.
5. Anderson v. Helvering, 310 U.S. 404">310 U.S. 404; Helvering v. Elbe Oil Land Development Co., 303 U.S. 372">303 U.S. 372↩.
7. That this provision is relatively unimportant is emphasized by the fact that in Kirby Petroleum Co. v. Commissioner, supra, the person who merely reserved 20 per cent of the net money profits realized by the operators was held entitled to a depletion allowance, and in Burton-Sutton Oil Co. v. Commissioner, supra↩, the assignor of the operators, who was entitled to 50 per cent of the proceeds of the oil, was held to have a depletable interest.