*286 Decision will be entered under Rule 50.
During 1949 and 1950, petitioner contracted with independent contractors to strip mine coal from its property. For such strip mining, the contractors were to be paid a price which was dependent upon the amount which petitioner received from the sale of the coal. Held, the independent contractors had an economic interest in the coal which they mined and petitioner must deduct the amounts paid to them from its gross income in computing its percentage depletion allowance under sections 23 (m) and 114 (b) of the 1939 Code.
*899 This proceeding involves deficiencies in income tax in the amount of $ 11,662.84 for the year 1949, and $ 2,086.25 for the year 1950 determined by the*287 respondent under the provisions of the 1939 Code. The parties reached agreement on certain issues and such agreement will be taken into account in a Rule 50 computation. The remaining issue is whether the respondent erred in determining that the amounts paid by petitioner to independent contractors for strip mining coal should be deducted from its gross income for purposes of computing its depletion allowance for both of the years in issue.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
*900 The petitioner is a West Virginia corporation with its principal office at Bluefield, West Virginia. It kept its books and filed its Federal income tax returns for the calendar years here in issue on the accrual basis with the collector of internal revenue for the district of West Virginia.
During the years in issue, petitioner was engaged in mining and selling bituminous coal from property which it leased. Deep, strip, and punch mining were employed in extracting the coal from said properties. From January 1 until sometime in August 1949, Swaney Contracting Company (hereinafter referred to as Swaney), *288 an independent contractor, strip mined coal from petitioner's property. Thereafter, throughout 1950, Blythe Brothers Company (hereinafter referred to as Blythe), another independent contractor, strip mined such coal.
The agreement between petitioner and Swaney provided, in part, as follows:
[Swaney] does agree to strip mine that portion of said coal that can be profitably and practically mined by what is known as the strip mining method with the tools and equipment that he has, he to be sole judge in this and all matters pertaining to the carry on of the strip operations.
* * * *
2. Said first party [petitioner] shall secure strip mining leases for coal and surface rights to strip mine coal covered by this contract and necessary priveleges [sic] of roads of ingress and egress for the necessary tools, supplies, equipment and personel [sic], so as said second party [Swaney] may supply without hindrance adequate machinery and equipment, together with sufficient employees to mine and haul agreed number of tons of coal a month and shall use his best efforts to produce that amount of coal monthly. The production of coal shall be as continous [sic] and uniform as is practicable*289 and reasonably possible.
* * * *
4. The party of the first part agrees to pay to the party of the second part the sum of $ 3.75 for each net ton of coal of 2000 pounds, stripped and removed from said lease and delivered into railroad cars during the life of this contract so long as the average monthly gross price per net equals $ 6.00 or more per tons, but it is agreed that in the event the average monthly gross price per net ton drops below $ 6.00, then the base amount of $ 3.75 is to be reduced by one half of any such decline or drop from that particular month. In addition thereto, the party of the first part agrees to pay to the party of the second part, an amount equal to one fourth of the remaining average gross price per net ton received during each month after deducting the following items: (a) Sales commission and other legitimate sales expense incurred by the party of the first part in the marketing of the coal in the amount of (b) Rents and royalties paid by the party of the first part to the lessor in the amount of (c) A fixed charge of .40 cents per net ton to cover miners Welfare Fund, Gross Sales Taxes, Siding Maintenance and other necessary administrative or*290 supervisory expenses. It is agreed that this fixed charge of .40 cents per net ton is to remain during the life of the contract at that figure unless, it is mutually agreed by the parties of the first and second parts that the party of the second part makes said contribution direct then .10 cents per net ton is to be deducted from the fixed charge of .40 cents or this fixed charge shall be .30 cents per net ton.
*901 The amount herein agreed upon is to be paid by the party of the first part to the party of the second part monthly at 702 Union National Bank Building, Clarksburg, West Virginia, and settlements are to be made by the twenty-fifth of each month for all coal passing railroad scales during the previous month. Each such payments [sic] shall be accompanied by a statement in the same form to be furnished by the coal company or sales agent for said first party, and payments shall be based on railroad weights unless it is deemed necessary that said coal be cleaned to make it marketable in which event loss from such cleaning shall be prorated to each of the parties hereto.
* * * *
The parties hereto agree that this contract may be cancelled by mutual consent at any*291 time, and by the parties hereto or either of them by giving to the other a ninety day written notice of its intention so to do and in such event then the party of the second part shall have a period of fifteen days in which to remove its equipment from said property.
9. It is agreed between the parties hereto that the party of the second part shall not assign, sell, lease, let or in any way dispose of this contract without the written consent of the party of the first part first had and obtained, but this lease shall inure to the advantage or disadvantage of the heirs or assigns of parts hereto.
On June 27, 1949, Swaney notified petitioner that it was terminating the agreement between them as of September 27, 1949. Petitioner thereafter entered into an agreement with Blythe substantially identical with the agreement which it had had with Swaney except that the price of $ 3.75 per ton of coal mined, as set forth in section 4 of the above-quoted agreement, was changed to $ 4. Blythe strip mined coal from petitioner's property during the remainder of 1949 and throughout 1950.
In 1949, Swaney mined 69,066 tons of coal and was paid $ 283,996.17, an average price of $ 4.112 per ton. *292 In 1949, Blythe mined 26,486 tons of coal and was paid $ 111,222.80, an average price of $ 4.199 per ton. In 1950, Blythe mined 83,853 tons of coal and was paid $ 351,718.01, an average price of $ 4.194 per ton.
In determining the deficiencies herein, the respondent deducted the amounts which petitioner paid to Swaney and Blythe from its gross income for purposes of computing its percentage depletion allowance.
Both Swaney and Blythe possessed an economic interest in the coal which they strip mined from petitioner's property.
OPINION.
The sole issue is whether Swaney and Blythe possessed only an economic advantage in the coal which they mined or whether they possessed a real economic interest therein. If they possessed only an economic advantage from their strip mining, petitioner retained the full economic interest in all the coal which they mined. If, on the other hand, Swaney and Blythe possessed an economic interest, petitioner, in computing its percentage depletion allowance as *902 provided by sections 23 (m) and 114 (b) (4) of the 1939 Code, 1 must deduct the amounts paid to them from its gross income. We found as a fact that Swaney and Blythe did possess an economic*293 interest in the coal which they strip mined.
*294 This issue has been before us a number of times. In several cases, we have found that independent contractors engaged in strip-mining operations possessed no economic interest in the coal which they mined because they were mere "hirelings" who performed services for the holder of the mining rights. , on appeal C. A. 4, October 21, 1955; . In other cases, we have found that the strip miners, by virtue of the agreements under which they mined, acquired a substantial economic interest in the coal and looked to a sale thereof for a recovery of their investment. ; .
We are unable to determine, from the agreements submitted in evidence, two questions which have material bearing in deciding the issue before us; namely, the quantity of coal which each independent contractor was to mine and whether such independent contractor had exclusive rights to conduct strip-mining operations on petitioner's property*295 during the period of his agreement. Even though the answers to those questions are in doubt, we think that section 4 of the agreements, setting forth the method for computing the amounts which Swaney and Blythe were to be paid, indicates clearly that their possibility of profit and, hence, the recovery of their investment was dependent to a large extent upon the sale of the coal. And as the Court of Appeals said in (C. A. 9, 1955), affirming a Memorandum Opinion of this Court filed June 30, 1954, in speaking of the various tests applied by the courts and the Treasury to determine whether an independent contractor possesses an economic interest in the coal which he mines:
*903 Prime among these tests is whether the extractor looks for his compensation to the severance and sale of the mineral or whether his compensation is dependent upon the personal covenant of those with whom he has contracted. In the former case his interest is obvious but if there is no sale of the mined mineral or no share thereof in kind * * * he receives no compensation.
We think that the agreements under which Swaney and Blythe*296 strip mined coal from petitioner's land gave them an economic interest in the coal because the two independent contractors were dependent upon the extraction and sale of the coal, and variations in the market price thereof, for a return on their investment. Regs. 111, sec. 29.23(m)-1. 2; and
*297 Decision will be entered under Rule 50.
Footnotes
1. 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. * * *
For percentage depletion allowable under this subsection, see section 114 (b), (3) and (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. * * *↩
2. Regulations 111.
Sec. 29.23(m)-1. Depletion of Mines, Oil and Gas Wells, Other Natural Deposits, and Timber; Depreciation of Improvements. -- Section 23 (m) provides that there shall be allowed as a deduction in computing net income in the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements. Section 114 prescribes the bases upon which depreciation and depletion are to be allowed.
Under such provisions, the owner of an economic interest in mineral deposits or standing timber is allowed annual depletion deductions. * * * An economic interest is possessed in every case in which the taxpayer has acquired, by investment, any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the severance and sale of the mineral or timber, to which he must look for a return of his capital. * * *
* * * *
When used in these sections (29.23(m)-1 to 29.23(m)-28, inclusive) covering depletion and depreciation --
* * * *
(b) A "mineral property" is the mineral deposit, the development and plant necessary for its extraction, and so much of the surface of the land only as is necessary for purposes of mineral extraction. The value of a mineral property is the combined value of its component parts.
(c↩) The term "mineral deposit" refers to minerals in place. The cost of a mineral deposit is that proportion of the total cost of the mineral property which the value of the deposit bears to the value of the property at the time of its purchase.