*2965 INCOME - EXEMPTION. - Petitioner's income derived from the sale of coal mined by it from school lands owned by the State of Colorado and leased by petitioner for coal-mining purposes, held, not exempt from Federal income and profits taxes, under authority of Coronado Oil & Gas Co.,14 B.T.A. 1214">14 B.T.A. 1214.
*1241 This proceeding involves deficiencies in the amounts of $401.44 and $2,644.96 in petitioner's income and profits taxes for the calendar years 1920 and 1921, respectively. For the year 1918 the respondent determined an overassessment in the amount of $810.87, and no deficiency has been asserted for 1919.
Petitioner alleges that respondent erred in determining that its net income, derived from the sale of coal mined by it from Colorado State school lands, is not exempt from Federal income and profits taxes.
FINDINGS OF FACT.
Petitioner is a Colorado corporation with its office at Trinidad, and is engaged in the business of mining and selling coal.
Petitioner's income was derived from the sale of coal mined by it from*2966 certain school land owned by the State of Colorado and duly leased to petitioner for coal-mining purposes. The land included in the said lease and from which the coal was mined was granted to the State of Colorado by the United States under an act of Congress entitled, "An Act donating Public lands to the several States and Territories which may provide Colleges for the Benefit of Agriculture and Mechanic Arts," approved July 2, 1862 (12 Stat. 503), and other acts amendatory thereof and supplemental thereto. Briefly stated the pertinent provisions of the said act are as follows:
Section 1 made a grant of a certain amount of public lands "to the several states, for the purposes hereinafter mentioned."
Section 2 authorized such of the several States as contained public lands to select specified areas of such lands, and directed the issuance of land scrip to those of the States in which there were no such lands.
Section 3 required the States to pay from their own treasuries all expenses "of management, superintendence and taxes, from date of selection of said lands, previous to their sales, and all expenses incurred in the management and disbursement of the moneys which may be*2967 received therefrom * * * so that the entire proceeds of the sale of said lands shall be applied without any diminution whatever to the purposes hereinafter mentioned."
Section 4 as amended by the Act of March 3, 1883 (22 Stat. 484), requires that all moneys derived from the sales of the lands and the scrip shall be invested and loaned in specified manners, to yield not less than 5 per centum per annum, and declared that the amounts so invested and loaned "shall forever remain unimpaired" and "shall constitute a perpetual fund, the capital of which shall remain forever *1242 undiminished, * * * and the interest of which shall be inviolably apportioned by each state * * * to the endowment, support and maintenance of at least one college where the leading object shall be * * * to teach such branches of learning as are related to agriculture and the mechanic arts."
Section 5 declares that "the grant of land and scrip hereby authorized shall be made on the following conditions, to which as well as to the provisions hereinbefore contained, the previous assent of the states shall be signified by legislative acts."
First. That the States shall make good and replace any portion*2968 of said funds which "shall, by any action or contingency, be diminished or lost," and that the "annual interest shall be regularly applied without diminution to the purposes mentioned in the fourth section of this act."
Second. "No portion of said fund, nor the interest thereon, shall be applied directly or indirectly, under any pretense whatever, to the purchase, erection, preservation or repair of any building or buildings."
Third. That the grant "shall cease," and the money already received from sales of lands and scrip shall be paid to the United States by each of such States as shall fail to "provide, within five years, at least not less than one college as described in section four of this act," but that, "the title to purchasers under the state shall be valid."
Fourth. "Annual reports shall be made regarding the progress made by each college," etc., to the Secretary of the Interior.
Seventh. "No state shall be entitled to the benefits of this act unless it shall express its acceptance thereof by its legislature."
The legislature of Colorado, in accepting the grant, stated:
Full and complete acceptance, ratification and assent is hereby made and given*2969 by the State of Colorado, to all the provisions, terms, grants and conditions and purposes of the grants made and prescribed by the Act of Congress of the United States * * * approved July 2, 1862. (Laws of Colorado, 1881, p. 18).
Article 9, section 9 of the Constitution of the State of Colorado provides for a State Board of Land Commissioner who shall have the duty of directing, controlling and disposing of the public lands of the State under regulations prescribed by law, and section 10 of the constitution provides that it shall be the duty of the said Board to provide for the location, protection, sale or other disposition of all the lands granted to the State by the Federal Government.
The pertinent provisions of the statutes of Colorado provide, briefly, that the State Board of Land Commissioners shall select and locate all lands granted to the State of Colorado by the Federal Government, "for any purpose whatever," and to secure the approval *1243 of such selections; that said Board select lien lands and classify, appraise and keep plots of the State public lands; that the said Board may lease mineral lands for mineral purposes for such length of time and conditioned*2970 upon the payment of such royalties as it may determine; that all funds, rents and royalties received by said Board shall be placed to the credit of the proper permanent school fund; that the purchaser or lessee must pay for improvements placed on the land by a prior occupant; that school lands must be disposed of only at public auction; that lessees shall file bond to protect the State against loss of rents or other loss or waste; and that the said Board shall appoint a superintendent to inspect all mines or other works operated under leases from the State, for the purpose of estimating and checking royalties due therefrom and for the purpose of requiring all mining to be conducted in accordance with approved mining methods.
On May 7, 1904, the State Board of Land Commissioners, acting on behalf of the State of Colorado, executed the following lease of the land involved in this proceeding to one William Cole:
COAL LAND LEASE
THIS INDENTURE, made this seventh day of May A.D. one thousand nine hundred and Four, by and between the State of Colorado, party of the first part, and William Cole, Trinidad, Colorado, of the County of Las Animas, in said State, party of the second part;
*2971 WITNESSETH, That the said party of the first part, for and in consideration of the covenants, and agreements hereinafter mentioned, to be kept and performed by the party of the second part, his heirs, executors, administrators and assigns, has demised and leased to the said party of the second part, the right and privilege of mining for and taking out COAL from the lands hereinafter described, lying and being in the County of Las Animas, in said State, the same being known and described as follows, viz:
| Acres | Part of section | Sec. | Twp. | Rge. |
| 160 | SW 1/4 | 2 | 32 S. | 65 W. |
| 80 | W 1/2 of SE 1/4 | 2 | 32 S. | 65 W. |
| 80 | W 1/2 of NE 1/4 | 11 | 32 S. | 65 W. |
| 40 | SE 1/4 of NE 1/4 | 11 | 32 S. | 65 W. |
| 160 | NW 1/4 | 11 | 32 S. | 65 W. |
| 320 | S 1/2 | 11 | 32 S. | 65 W. |
TO HAVE AND TO HOLD the said above described premises with the appurtenances, unto the said party of the second part, his heirs, executors, administrators and assigns, from the 20th day of April A.D. 1904, for the full term of eight (8) years, being until the 20th day of April A.D. 1912. The said party of the second part, in consideration of the leasing of said premises and privileges aforesaid, by the said party*2972 of the first part, to the said party of the second part, does covenant and agree to and with the first party as follows, viz:
First. - That within sixty days from the signing of this lease, the party of the second part will commence to prospect for coal upon said premises, and will *1244 continuously pursue such prospecting until coal is found of sufficient thickness to justify mining of same, or in case workable coal is not found, work may cease if the Register of the State Land Board is so notified in writing, and said Register, at his option, may declare this lease void and ended and both parties released from all obligations thereunder. If coal of workable thickness is found, then the party of the second part shall, within six months from the date of this lease, commence to open the same by a shaft or drift of proper size and continually and with reasonable energy develop the coal in a good and workmanlike manner and take out and pay royalty on not less than Two Thousand (2,000) tons of coal annually, after the first year of this lease.
Second. - That this lease is to be taken and considered as a coal lease only, the party of the first part expressly reserving the*2973 right to lease at any time so much of the surface of the lands herein described as is not actually needed and occupied by the party of the second part for the purpose of mining for COAL, as herein stated.
Third. - That in the underground workings for said coal all shafts, inclines and tunnels shall be well timbered (when good mining requires timbering) and that all parts of workings, where the coal is not exhausted and for good reasons not being worked, will be kept free from water and waste material, as in ordinary operations, and that the underground workings shall be protected against fire and floods, and the creeps and squeezes shall be guarded against, and when they do occur shall be checked in a manner in keeping with good mining. That such methods of mining shall be used as shall insure the extraction of the greatest amount of the coal vein possible.
Fourth. - During all the proper hours and at all times during the continuance of this lease, said party of the first part by its duly authorized agent or agents, named and appointed by the State Board of Land Commissioners, of the said first party, or by the President or Register of said Board, shall be, and hereby are authorized*2974 to go through any of the shafts, openings or workings on said premises and to examine, inspect and survey the same, and to examine and make extracts or copies of all books and weigh sheets that show in any way the coal output of said premises, and that all conveniences necessary for said inspection survey or examination shall be furnished said agent or agents by the party of the second part.
Fifth. - That all COAL mined or taken from said premises, upon being hoisted or trammed, shall be weighed, and the weight thereof shall be entered in due from in books kept for such purpose by the party of the second part and the weight of all COAL shipped by railway or otherwise shall be kept and preserved.
Sixth. - That on or before the 15th day of each and every month during the term of this lease, the said second party shall make a report to the Register of said Board of Land Commissioners in which shall be entered and set down the exact amount in weight and cubic yards of all COAL mined upon said premises during the preceding calendar month, and said report shall be accompanied by the weights of the railway companies over which such COAL or any part thereof has been transported, and*2975 shall also show the use or disposal by said party of the second part of coal in all other ways.
Seventh. - That the said party of the second part shall pay unto the said party of the first part for the right and privilege of mining COAL upon said premises as herein provided a royalty of Ten (10) cents per ton of coal mined and taken out of said premises, which royalty shall be due and payable on or before the 15th day of each and every month during the term of this lease for the preceding calendar month, PROVIDED ALWAYS, HOWEVER, that the minimum *1245 amount of monthly royalty shall be one-twelfth of the yearly royalty hereinafter provided for, whether any coal is mined or not, and
PROVIDED FURTHER, that the sum of Two (200) hundred dollars paid by said party of the second part to the said party of the first part at the ensealing and delivery of these presents shall be in full for the minimum yearly royalty for the first year, but in the event of the total royalty due and payable herein shall at the end of the first year of this lease be found to exceed said sum of Two (200) hundred dollars then and in that case said sum shall be applied as a credit on the amount of royalty*2976 so found to be due for said first year.
AND PROVIDED FURTHER, that the total minimum yearly royalty from and payable by said party of the second part in each and every year during the term of this lease, is hereby fixed at and shall be Two (200) hundred dollars, whether any COAL is mined or not.
The term ton as herein used means a ton of two thousand pounds of unscreened coal unless said party of the first part, the State Board of Land Commissioners, or its duly authorized agent or agents, elects to compute a ton of coal at twenty-seven cubic feet of coal in the solid or by the measurements of the space for which the coal is mined, deducting therefrom all space occupied by slate or other impurities, and in such case the said computation shall be final and binding upon said party of the second part.
IT IS EXPRESSLY UNDERSTOOD AND AGREED, By and between the parties hereto that all mining, timbering and work done by the party of the second part on said premises shall be at all times during the terms of this lease subject to the supervision, approval and orders of the Superintendent of the Mineral Department of said State Board of Land Commissioners.
AND IT IS EXPRESSLY UNDERSTOOD*2977 AND COVENANTED, By and between the parties aforesaid, that, if for any reason said party of the second part shall fail to keep each, all and every one of the covenants by him covenanted aforesaid, then, and in that event, it shall and may be lawful for the said party of the first part to declare this INDENTURE at an end, and enter into the said premises or any part thereof, either with or without process of law to re-enter and the said party of the second part or any persons occupying, in or upon the same to expel, remove and put out, using such force as may be necessary in so doing, and the said premises again to repossess and enjoy, as in its first and former estate. And in such event, that is to say, in the event of the termination of this lease by reason of the breach or breaches of the covenants aforesaid, or at the expiration of the term aforesaid, said party of the second part hereby covenants and agrees to surrender and deliver up said above described premises and property, a good mining condition, peaceably to the said party of the first part, and shall forfeit to the state and make no claim for any moneys, work, improvements, or time laid out or expended in the premises. *2978 And upon the termination of this lease for any cause aforesaid, if said second party shall remain in the possession thereof he shall be deemed guilty of an unlawful detainer of said premises, under the Statutes in such case made and provided, and shall be subject to all the conditions and provisions thereof, and to eviction and removal forcibly or otherwise, with or without process of law as above stated.
IT IS ALSO EXPRESSLY UNDERSTOOD AND AGREED that this lease shall not be assigned or the property sublet without the consent and approval of the State Board of Land Commissioners, and that the privileges hereby granted will not be used for any other purposes than mining COAL from said premises and will not be used for the mining, handling or transportation of COAL other than that mined on land under the control of the State Board of Land Commissioners.
*1246 IN WITNESS WHEREOF, The said party of the first part hath caused these presents to be signed by the President and Register of said State Board of Land Commissioners, and sealed with the official seal of said Board, and the said party of the second part has hereunto set his hand and seal on this, the day and year first*2979 hereinabove written.
(Signed) JAMES H. PEABODY [SEAL]
President of the State Board of Land Commissioners.
(Signed) MARK G. WOODRUFF [SEAL]
Register of the State Board of Land Commissioners.
Under date of August 15, 1904, William Cole assigned said coal lease to J. M. Bray, who assigned it to J. J. J. Abercrombie, J. M. Coon and H. W. Gilbert, under date of September 13, 1904, and the three latter joint lessees assigned the said lease to the Bear Canon Coal Co., under date of May 23, 1905. Each of the said assignments was duly approved by the State Board of Land Commissioners.
By order of the State Board of Land Commissioners on December 10, 1910, the term of the lease was extended for a further period of 5 years, terminating on April 208 1917; by another order on October 13, 1914, the term was extended 10 years, expiring on April 20, 1927; and by another order on November 27, 1923, the term of the lease was further extended for 20 years, expiring on April 20, 1947. In some of those years slight changes were made in the acreage included in the lease. Petitioner applied to the State Board of Land Commissioners for the said extensions of the term of years*2980 of the lease, and after publication of the applications and the failure of any persons to protest thereto, they were granted as aforesaid.
OPINION.
TRUSSELL: No issue has been raised as to the correctness of the respondent's computation of petitioner's net income and the taxes thereon for the years in question. The only issue is whether petitioner is exempt from Federal income and profits taxes, and if it is not exempt, then the deficiencies are in the amounts as determined by respondent.
Petitioner contends that in holding, using, and disposing of school lands and the proceeds and increments thereof, the State of Colorado exercises its governmental powers and functions; that in the exercise of such powers the State of Colorado adopted and used the petitioner as its instrumentality to enable the State to meet and comply with the conditions of the grant under the Act of 1862; and that income accruing to petitioner, through its operation of the mines on school lands as an instrumentality of the State, is not taxable by the Federal Government.
The Board's decision in *2981 Coronado Oil & Gas Co.,14 B.T.A. 1214">14 B.T.A. 1214, is controlling in the decision of the case at bar. It is true that the *1247 school lands involved in the Coronado case, supra, were granted to the State of Oklahoma by a different act of Congress than the act granting the school lands here involved to the State of Colorado, but both of the acts made grants of land to the said States for the purpose of establishing perpetual school funds, and the duties and obligations resting upon the said States are the same for all intents and purposes. The essential facts in the Coronado case, supra, and the case at bar, are identical, namely, that the petitioners' incomes were derived from the sale of minerals produced by their own private capital for their individual profit, from mineral-bearing school lands owned by the said States and leased to petitioners by the state boards of land commissioners in the same manner in which all of the said States public lands were leased to private individuals.
In the Coronado case, supra, the Board said:
We do not think that petitioner under the facts here proven, as a lessee of public school lands in Oklahoma, for*2982 private and individual profit, stands in a position different, in so far as a liability for Federal income tax is concerned, from a lessee of other property of the State or property of a private individual. We can not see in the taxing by the Federal Government of its income therefrom an interference with the exercise by that State of one of its governmental powers.
We are of the opinion that petitioner is not exempt from Federal income and profits taxes.
Reviewed by the Board.
Judgment will be entered for the respondent.