*1564 1. STATUTE OF LIMITATIONS - WAIVER. A waiver extending the time for assessment and collection of 1921 taxes to a stated date and executed by petitioner in 1926, held to be subject to the provisions of the 1926 Act, and as the notice of deficiency was mailed to petitioner within the stated period and appeal filed within 60 days thereafter, the date of expiration agreed upon is extended by section 277(b) of that Act and assessment and collection is not barred.
2. AFFILIATION. Upon the evidence it is held that petitioner has not sustained the burden of proving that it was not affiliated with the Logan Mining Company in 1921, and the action of respondent in computing the tax upon a consolidated basis is approved, the requiring of mandatory consolidation of affiliated corporations for tax purposes, even though resulting in a greater aggregate tax than if computed in each instance on a separate basis being within the power of Congress.
3. MINIMUM ROYALTIES. Held to be deductible in the year in which paid.
4. EXPENSE. The cost of certain equipment bought and used in the taxable year to maintain normal production, held, to represent deductible expense for*1565 such year. West Virginia-Pittsburgh Coal Co.,24 B.T.A. 234.
*973 This proceeding asks redetermination of a deficiency in income and profits taxes for 1921 in the amount of $7,100.25, determined upon the basis of affiliation of petitioner with the Logan Mining Company, another corporation. Petitioner assigns error, contending *974 that (1) assessment and collection of the deficiency is barred by the statute of limitations; (2) if not barred, then respondent has erred in computing the tax upon a consolidated basis; (3) he has failed to allow a deduction for a depletion in the sum of $1,114.64; (4) he has failed to allow a deduction of $16,154.52 representing minimum royalties paid pursuant to a lease agreement; (5) he has failed to allow the Logan Mining Company a deduction for depletion in the sum of $90.18; (6) he has failed to allow the Logan Mining Company a deduction of $12,693.07 representing operating expenses in the purchase and use of light rails, small pumps and motors to maintain normal*1566 production; and (7) any deficiency for 1921 against the Logan Mining Company is barred by the statute of limitations.
FINDINGS OF FACT.
Petitioner is a West Virginia corporation, with principal office at Fairmont, and was incorporated in 1909, with general powers, to mine coal. The Logan Mining Company is a West Virginia corporation, incorporated in 1902, with powers similar to those possessed by petitioner.
Each of these corporations filed separate returns for the taxable year, petitioner filing a tentative return on March 14, 1922, and a final return on June 15, 1922. Petitioner filed the following waivers:
IT:CR:G-1.
CWZ
INCOME AND PROFITS TAX WAIVER
For Taxable years ended prior
to January 1, 1922.
JANY. 19, 1926.
In pursuance of the provisions of existing Internal Revenue Laws, Hutchinson Coal Company, of Fairmont, West Virginia, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1921, under existing revenue acts, or under prior revenue acts.
This waiver of the*1567 time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
HUTCHINSON COAL COMPANY, Taxpayer.
By C. H. JENKINS, Vice-prest.
D. H. BLAIR, Commissioner.
IT:CR:G-1.
FCC
*975 INCOME AND PROFITS TAX WAIVER
For taxable years ended prior
To January 1, 1923.
DECEMBER 18, 1926.
In pursuance of the provisions of existing Internal Revenue laws, Hutchinson Coal Company, a taxpayer, of Fairmont, West Virginia, and the Commissioner of Internal Revenue, hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits or war-profits taxes due under any returns made by or on behalf of said taxpayer for the year 1921, under existing revenue*1568 acts, or under prior revenue acts.
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1927, and shall then expire.
HUTCHINSON COAL COMPANY, Taxpayer.
By C. H. JENKINS, Vice-president.
D. H. BLAIR, Commissioner.
The deficiency letter from which this appeal was taken was mailed to petitioner on December 14, 1927.
Respondent has determined the tax liabilities of these two corporations on the basis of a consolidated return resulting in a deficiency for the petitioner of $7,100.25, and an overassessment for the Logan Mining Company of $2,166.73.
In 1921 the stockholdings in the two corporations were as follows:
| Petitioner | Logan Mining Co. | |||||
| Stockholder | Shares | Shares | Per cent | Shares | Shares | Per cent |
| M. L. Hutchinson | 6,000 | 3,180 | ||||
| C. E. Hutchinson | 6,000 | 3,380 | ||||
| T. W. Arnett | 411 | 400 | ||||
| B. Lee Hutchinson | 100 | |||||
| Brooks S. Hutchinson | 60 | |||||
| Mrs. C. E. Hutchinson | 40 | |||||
| 12,411 | 82.74 | 7,160 | 71.60 | |||
| C. H. Jenkins | 724 | 733 | ||||
| Mrs. C. H. Jenkins | 14 | |||||
| 738 | 4.92 | 733 | 7.33 | |||
| V. L. Highland | 595 | 340 | ||||
| S. C. Denham | 595 | 340 | ||||
| L. McCandlish | 552 | 340 | ||||
| E. C. Currey | 12 | 20 | ||||
| 1,754 | 11.69 | 1,040 | 10.40 | |||
| Total | 14,903 | 99.35 | 8,933 | 89.33 |
*1569 M. L. Hutchinson was the president of petitioner. C. E. Hutchinson was president of the Logan Mining Company, and is a brother of M. L. Hutchinson. Mrs. C. E. Hutchinson is the wife of the said C. E. Hutchinson, and B. Lee Hutchinson and Brooks S. Hutchinson are his sons. T. W. Arnett is the brother-in-law of Mrs. C. E. Hutchinson. C. H. Jenkins was vice president of both corporations, and Mrs. C. H. Jenkins is his wife. V. L. Highland, S. C. Denham, L. McCandlish, E. C. Currey, C. J. Ryan, J. G. Wolfe, and J. J. Ross were not related to one another or to any of the stockholders *976 of either corporation. The said Wolfe was the general bookkeeper of the two corporations from 1916 to 1925.
The coal properties of the two corporations were about 200 miles apart and the corporations were not competitive, for the reason that their products were of different characters, used for different purposes, and sold in different markets. They maintained a common general office and kept their books of account together, their directorates being interlocking, and had the same officers with the exception of their presidents. The president of each corporation acted also as general*1570 manager thereof, making decisions with respect to his company. Petitioner acted as sales agent for the Logan Mining Company, but sales of its coal were entirely separate and were accounted for separately, the office and selling expenses being prorated to the two corporations upon the basis of the tonnage of coal sold by each.
C. H. Jenkins was in charge of the operations of the mines of both corporations, taking his instructions as to each corporation from the president thereof. There were no intercompany transactions involving profit or loss to either corporation.Under date of May 1, 1916, the petitioner, as lessee, entered into an agreement with the Commercial Coal & Coke Company providing, so far as here material, as follows:
I. That the said Lessor, for and in consideration of the rentals, royalties. terms, conditions and undertakings hereinafter provided to be paid, kept and performed by the said Lessee, its successors and assigns, does demise, lease and let unto the said Lessee, all of the Pittsburg vein or stratum of coal contained in and underlying that certain tract or parcel of land, lying in Eagle District in the County of Harrison and State of West Virginia, *1571 situate on the waters of Lambert's Run and Tenmile Creek, and bounded and described as follows, to-wit: [Description omitted.]
II. This lease shall continue and remain in force for and during such term as shall be necessary for the full and complete mining and removal of all of the Pittsburg vein or stratum of coal contained in and underlying said land, or until this lease is sooner forfeited, surrendered or otherwise terminated in accordance with the provisions hereinafter set out.* * *
IV. The royalty and rental to be paid by the Lessee shall be so many cents per ton (to be fixed at stated intervals as hereinafter provided) for each and every ton of twenty-two hundred and forty (2240) pounds of run of mine coal mined from said premises. During the first period of seven (7) years and eight (8) months beginning on this date and ending on the 31st day of December, 1923, this rate of royalty shall be twelve (12) cents for each of said tons. And for and during all of the succeeding life and duration of this lease after the 31st day of December, 1923, such rate and royalty shall be not less than said amount of twelve (12) cents for each and every of such tons of coal mined*1572 from the premises, and shall be fixed at intervals as next hereinafter provided. * * *
* * *
*977 VI. It is further agreed that for and during the remainder of this year 1916, the Lessee shall mine and remove not less than fifty thousand (50,000) tons of coal from said premises, and that for and during the year 1917 the Lessee shall mine and remove not less than one hundred thousand (100,000) tons of coal from said premises, and that for and during the remainder of the term of this lease, ensuing after December 31st, 1917, the Lessee shall mine and remove from the said premises, not less than one hundred and fifty thousand (150,000) tons of coal during each year, and that the said Lessee shall in any event, whether or not the aforesaid minimum amount of coal is mined during the years aforesaid, or any of them, as hereinabove provided, pay to the said Lessor the royalties hereinabove provided for the said minimum amount of coal, until it shall have paid for all the recoverable coal in said demised premises, and if more coal than the minimum amount is mined in any one year, then said Lessee shall in addition pay to the Lessor the said royalty for each ton of such excess. *1573 All payments for royalty are to be made on the 25th day of each and every calendar month for the coal mined during the preceding month at the rate or rates per ton above specified. And any additional sum or payments required to make the minimum amount of rental or royalty for the year 1916, and for each year thereafter, shall be paid on or before the 25th day of January next following the end of such year. And in the event the amount of coal actually mined during any one year shall be less than said minimum hereinabove provided, for which payment is herein agreed to be made, the Lessee shall have the right in and during any succeeding year of this lease, after the minimum output for such succeeding year shall have been mined, or after it shall have paid for all of the recoverable coal in said demised premises, to mine and remove, without additional compensation, the amount of coal so paid for during such former years of this lease and not theretofore mined by it. But all coal actually mined and removed in excess of the minimum hereinabove agreed, shall be paid for at the rates hereinabove provided, on the 25th day of the month next succeeding that in which it shall have been mined.
*1574 * * *
XIV. It is further mutually agreed by and between the parties hereto that in the event the said lessee shall at any time make default in the payment of any rent or royalty then due under the terms of this lease, or if the said lessee shall neglect or refuse to comply with any other requirement of this agreement for a period of ten days after the lessor has notified said lessee of such neglect or refusal, then the lessor, its successors and assigns, in addition to any and all other rights and remedies herein saved and reserved to the lessor for the enforcement of the payment of, and lien for, said rentals and royalties, and for the enforcement of the performance of said several covenants and stipulations, shall have the right, at its election, after ninety days notice thereof in writing to the said lessee, unless lessee shall cure such default in such period, to declare this contract and the lease and leasehold estate hereby created forfeited and at an end, and to re-enter and take possession of the premises hereby demised and take and assume full and complete possession of the same and of all buildings, structures, tipples, tracks and other improvements placed thereon by*1575 the said lessee, free from any claim, right and title of the said lessee, or its successors and assigns therein. Provided, however, that the lessee shall have the right during the said period of ten days following the giving of said first notice to require that all disputes and controversies over the matters involved in such notice shall be forthwith submitted *978 to arbitration in the manner provided by Section XV of this agreement, in which event the said lessor shall have the right, at its election, immediately after a finding and decision of the Board of Arbitrators adverse to the lessee, to give to said lessee said notice of declaration of forfeiture with the same effect and subject to the same conditions as hereinabove provided.
On October 26, 1916, petitioner, as lessee, entered into an agreement with the Commercial Coal & Coke Company providing, so far as here material, as follows:
That, the said Lessor, for and in consideration of the rentals, royalties, terms, conditions and undertakings hereinafter provided to be paid, kept and performed by the said Lessee, does agree to demise, lease and let unto the said Lessee, all of the Pittsburg vein or stratum of coal*1576 owned by the Lessor and contained in and underlying a certain area and tract of land lying in Eagle District in Harrison County, West Virginia, on Tenmile Creek and waters of Lamber's Run, and bounded and described substantially as follows: [Description omitted.]
II.This lease shall continue and remain in force for and during such term as shall be necessary for the full and complete mining and removal of all of the Pittsburg vein or stratum of coal contained in and underlying said land, or until this lease is sooner forfeited, surrendered or otherwise terminated in accordance with the provisions hereinafter set out.
* * *
IV.The royalty and rental to be paid by the lessee shall be twelve (12) cents for each and every ton of twenty-two hundred and forty pounds of run of mine coal mined from said premises during the term of five years next following the 26th day of October, 1916, and fifteen (15) cents for each and every of such tons of twenty-two hundred and forty (2240) pounds of run of mine coal mined from said premises during all the years succeeding after said five year period.
V.It is further agreed that for and during the year next following the 26th day*1577 of October, 1916, the lessee shall mine and remove from said premises such amount of coal as is practicable under the circumstances, and that for and during the second year beginning on October 26th, 1917, the lessee shall mine and remove not less than one hundred thousand (100,000) tons of coal from said premises, and that for and during the third year beginning on the 26th day of October 1918 the lessee shall mine and remove not less than one hundred and fifty thousand (150,000) tons of coal from the premises, and that during each year after said third year the lessee shall mine and remove not less than two hundred thousand (200,000) tons from said premises; and that the said lessee shall in any event, whether or not the aforesaid minimum amount of coal is mined during the years aforesaid, or any of them, as hereinabove provided, pay to the said lessor the royalties hereinabove provided for the said minimum amount of coal, until it shall have paid for all the recoverable coal in said demised premises, and if more coal than the minimum amount is mined in any one year, then said lessee shall in addition pay to the lessor the *979 said royalty for each ton of such excess. All*1578 payments for royalty are to be made on the 25th day of each and every calendar month for the coal mined during the preceding month at the rate or rates per ton above specified. And any additional sums or payments required to make the minimum amount of rental or royalty for the year ending on October 26th, 1918, and for each year thereafter, shall be paid on or before the 25th day of January next following the end of such year. And in the event the amount of coal actually mined during any one year shall be less than said minimum hereinabove provided, for which payment is herein agreed to be made, the lessee shall have the right in and during any succeeding year of this lease, after the minimum output for such succeeding year shall have been mined, or after it shall have paid for all the recoverable coal in said demised premises, to mine and remove, without additional compensation, the amount of coal so paid for during such former years of this lease and not theretofore mined by it. But all coal actually mined and removed in excess of the minimum hereinabove agreed, shall be paid for at the rates hereinabove provided, on the 25th day of the month next succeeding that in which it shall*1579 have been mined.
* * *
XII.It is further mutually agreed by and between the parties hereto that in the event that said lessee shall at any time make default in the payment of any rent or royalty then due under the terms of this lease, or it the said lessee shall neglect or refuse to comply with any other requirement of this agreement for a period of ten days after the lessor has notified said lessee of such neglect or refusal, then the lessor, its successors and assigns, in addition to any and all other rights and remedies herein saved and reserved to the lessor for the enforcement of the payment of, and lien for, said rentals and royalties, and for the enforcement of the performance of said several covenants and stipulations, shall have the right, at its election, after ninety days notice thereof in writing to the said lessee, unless lessee shall cure such default in such period, to declare this contract and the lease and leasehold estate hereby created forfeited and at an end, and to reenter and take possession of the premises hereby demised and take and assume full and complete possession of the same and of all buildings, structures, tipples, tracks, and other improvements, *1580 placed thereon by the said lessee, free from any claim, right and title of the said lessee, or its successors and assigns therein. Provided, however, that the lessee shall have the right during the said period of ten days following the giving of said first notice to require that all disputes and controversies over the matters involved in such notice shall be forthwith submitted to arbitration in the manner provided by Section XV of this agreement, in which event the said lessor shall have the right, at its election, immediately after a finding and decision of the Board of Arbitrators adverse to the lessee, to give to said lessee said notice of declaration of forfeiture with the same effect and subject to the same conditions as hereinabove provided.
* * *
Petitioner actually produced from these leased properties 215,379 tons of coal in 1921, while the minimum tonnage provided in the lease agreements amounted to 350,000 tons. The aggregate minimum royalties actually paid by the petitioner in 1921 in excess of the *980 royalties paid upon coal actually mined amounted to $16,154.52, being at the rate of 12 cents per ton. In the return filed by petitioner for that year no*1581 deduction was claimed or taken for said additional royalties of $16,154.52.
It has been the practice of the Logan Mining Company to charge off to expense in each year the cost of light rails, small pumps, and motors purchased and used and which, in the opinion of the officers of the corporation, merely maintained normal production of the mine. In 1921 this corporation bought and used light rails at a cost of $10,868.07, and mine pumps and motors at a cost of $1,825. This entire expense of $12,693.07 was charged off to profit and loss and has been disallowed as a deduction by the respondent, who has in lieu thereof capitalized such cost and allowed a deduction as representing the physical depreciation of this equipment. The mines here under consideration reached full development in 1916, following operations for at least 12 years. These mines were worked under the room-and-pillar method, resulting in receding working faces, and the additional equipment under consideration was purchased and used to maintain normal production. This equipment did not increase the value of the mine or its output.
With respect to the Logan Mining Company, respondent has determined an overassessment*1582 for 1921, and that company is not a party to this proceeding.
OPINION.
TRAMMELL: On the hearing of this proceeding the petitioner abandoned issues 3 and 5 and has submitted the remaining five issues for decision. Under the first issue petitioner contends that the bar of the statute of limitations upon assessment and collection of the proposed deficiency took effect December 31, 1927, the date when the waiver dated December 18, 1926, was expressly agreed upon to terminate. It argues that by reason of the failure of the waiver to provide for an extension of the time beyond such date for any reason whatever, the assessment was outlawed.
The deficiency has been determined by respondent under authority of section 283(a) of the Revenue Act of 1926, and the assessment is subject to the same provisions and limitations as in the case of a deficiency for 1926. The Revenue Act of 1926 provides:
SEC. 277. (b) The running of the statute of limitations provided in this section or in section 278 on the making of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under subdivision (a) *1583 of section 274) be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or a proceeding in court, and for 60 days thereafter.
*981 SEC. 278. (c) Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.
There is no question as to the validity of the waiver of December 18, 1926, the previous waiver of January 19, 1926, having extended the time, so that the statute had not expired when the latter one was executed.
When the waiver in question was executed by petitioner these provisions of the law were in effect, and before the expiration date of that waiver agreed upon, respondent mailed to petitioner the final notice of deficiency here appealed from, and thereafter for 60 days was prevented under section 274 from making assessment of the tax, except under section 279 in case he believed that collection would be jeopardized by delay. Petitioner contends that assessment and collection of the proposed deficiency was jeopardized*1584 and that respondent should have proceeded to make an assessment in order to protect the tax. In respect of this contention we think it necessary merely to point out that the question as to whether collection of the tax was in jeopardy is, under section 279, one for determination solely by respondent in the exercise of his discretion, and we are precluded from finding that collection was jeopardized in the absence of a conclusion by him to that effect.
Petitioner has availed itself of the privilege of an appeal to this Board for redetermination of the deficiency, and the time for assessment is further extended under section 274(a) until our decision has become final. We hold that assessment and collection is not barred.
Under the second issue, petitioner contends that the tax should not have been computed upon the basis of a consolidated return. The Revenue Act of 1921 provides under section 240(e) for compulsory consolidation for tax purposes of affiliated corporations for any taxable year prior to January 1, 1922, and subject to the same conditions as provided in the Revenue Act of 1918. The 1918 Act is also mandatory and provided in section 240(b) that corporations shall*1585 be deemed to be affiliated through ownership of the stock or through control by the same interests.
The respective stockholdings in the two corporations here involved are set out in our findings, these showing that there was a minority holding of a trifle more than 10 per cent of the stock in one corporation and that the owners of the majority of the stock in such corporation owned all of the stock in the other. The evidence also discloses the relationship of the various stockholders, the common officers, except president, and common directors.
*982 Petitioner has not sustained the burden of proving error on the part of the respondent in computing the tax upon a consolidated basis, and we do not agree with its insistence that the mandatory consolidation of two corporations for income-tax purposes, resulting in a greater amount of tax in the aggregate than if such tax were computed on the basis of separate returns, is a taking of property without due process of law in violation of the constituional prohibition. In requiring compulsory consolidation of affiliated corporations for tax purposes Congress is within its authority. *1586 .
Under the fourth issue petitioner contends that certain additional or minimum royalties paid during the taxable year represent ordinary and necessary expenses deductible in computing net income. These amounts have been treated by respondent as capital expenditures. The amounts in question represent sums paid by petitioner under the terms of certain leases as royalties in excess of those paid upon coal actually produced, these additional payments being made under minimum production requirements of the contracts obligating petitioner to pay royalties computed upon a certain amount of production whether this amount was reached or not, these additional royalties to be credited upon future production in excess of minimum requirements for such future year.
In this connection it has been held that royalties are rents and not the purchase price of minerals in place. They are payments required to be made for the continued use and emjoyment of the property rights to which title is not being acquired. The minimum amount is required to be paid each year, for the use, possession*1587 and enjoyment for that year, with the qualification or contingency that if in a future year the coal mined exceeded the amount of the minimum required for such year, the excess of the minimum payment for a previous year, would be credited against coal mined in such year. If this were in fact an advance royalty, we think that the advance payment should be spread over the period or years when the coal is mined, but, as we pointed out in , we do not so consider it. There are too many uncertainties and contingencies. At the time of the minimum royalty payment it could not be foretold whether the excess payment over actual production of the year could ever be availed of. We think that on the authority of the above decision, as well as our decision in the Bogle case, (affirmed by the ), the minimum royalties paid each year are deductible when paid. ; *1588 ; *983 ; .
Under the sixth issue, petitioner contends for the right to a deduction by the Logan Mining Company of expenditures covering items of equipment which normally represent capital outlays but in the present case are shown to have been purchased and used merely to maintain normal production. This question has been heretofore passed upon by the courts and by the Board and the allowance of such expenditures as expenses of business sustained. ; ; ; . Upon authority of those cases we hold that the deduction of $12,693.07 should be allowed in recomputing the consolidated income of these two corporations.
Another issue, relating to depletion, was abandoned. The determination of the respondent with respect thereto is, therefore, affirmed.
*1589 Judgment will be entered under Rule 50.