*242 Decisions will be entered under Rule 50.
1. Depletion -- Percentage -- Gross Income From the Property -- Economic Interest of Separate Miner -- Sec. 114 (b) (4) (A), I. R. C. -- Regs. 111, Sec. 23 (m)-1 (f). -- A percentage of gross sales less rents, royalties, and sales commissions, paid to a separate entity for mining, producing, transporting, and loading coal from leased premises must be excluded from the "gross income from the property" of the lessee in computing percentage depletion of the lessee. James Ruston, 19 T. C. 284, dismissed (C. A. 4, Sept. 18, 1953) followed.
2. Depleton -- Percentage -- Rents -- Railroad Siding -- Sec. 114 (b) (4) (A), I. R. C. -- Rent paid for a railroad siding not connected with the mining properties or a part thereof is not excluded as "rent * * * in respect of the property" within section 114 (b) (4) (A).
*58 The Commissioner determined a deficiency in income tax for 1946 of $ 6,632.76 in the case of Helen and one of $ 7,134.52 in the case of Earl. Helen assigns as error the action of the Commissioner in "overstating her share of partnership income received from the partnership of 'Earl M. Brown Company' by the said amount of $ 10,415.92." Earl assigns a similar error but the amount is one cent less.
FINDINGS OF FACT.
The petitioners, husband and wife and equal partners in the partnership of Earl M. Brown Company, filed separate income tax returns for 1946 with the collector of internal revenue for the twenty-third district of Pennsylvania. They kept their books and filed their returns on the cash receipts and disbursements basis of accounting for calendar years as did their partnership, Earl M. Brown Company.
*59 The partnership owned a number of leases on coal properties and owned the fee to one coal property. Coal was mined from those properties and sold during 1946 partly by means of a deep*244 mine and partly by a stripping process.
Each petitioner owned one-half of the stock of E. M. Brown, Incorporated. The corporation owned machinery, facilities, and equipment which it used in 1946 in mining and processing coal from the properties of the partnership and transporting it to and loading it on railroad cars, under a contract which it had with the partnership.
The contract between the partnership and the corporation was dated March 16, 1946. The corporation agreed to go on the properties of the partnership, mine the coal either by the open pit or deep mining method, and deliver the coal to railroad sidings. It also agreed to do the backfilling required by State law. The contract was for 1 year with the right in the corporation to renew for further periods of 1 year and from year to year while it was not in default and coal was still available. The partnership was to pay the corporation
for the mining, producing, loading and transporting of the said coal to the railroad sidings herein described, an amount as follows: Seventy-five (75%) percent of the realization of Brown Company upon the sale of the coal so produced after deducting the following charges:
a. Royalties*245 due to lessors of Brown Company.
b. Siding rentals.
c. Commissions paid to brokers, distributors or sales agents charged to Brown Company upon the sale of said coal.
The partnership entered into an agreement dated January 4, 1944, with Harold J. Boulton, trustee for Robert Earl Brown and Allan Murray Brown, minors, for the rental of a railroad siding for a period of 10 years at a rental of $ 25 per month or 7 cents per ton of coal or clay loaded and shipped at the siding, whichever should prove to be greater. Some of the coal here in question was shipped from that siding.
The partnership on its return for 1946 claimed $ 31,995.93 as a deduction for depletion of coal mines. It explained that deduction as follows:
| Partnership elects to take % depletion on coal sales | |
| Coal sales | $ 679,045.83 |
| Less: Royalty paid | 39,127.16 |
| $ 639,918.67 | |
| 5% thereof | $ 31,995.93 |
The partnership reported $ 679,045.83 as gross receipts from its business, subtracted under cost of goods sold $ 454,502.02 as "Cost of labor, supplies, etc." to arrive at gross profit from its business of $ 224,543.81. It explained that the cost of goods sold, "Cost of labor, *60 supplies, etc. $ 454,502.02," *246 consisted of $ 49,164.38 of wages and $ 405,337.64 described as "Contract Mining, Stripping & Loading."
The corporation reported as a part of its gross receipts $ 453,330.97 described as "Contract Mining, Stripping & Loading." It reported gross receipts of $ 501,318.51 from which it deducted cost of operations of $ 319,743.83 to arrive at gross profit of $ 181,574.68.
The Commissioner, in determining the deficiencies, increased Helen's income from the partnership by $ 10,415.92 and increased Earl's income from the partnership by $ 10,415.91, the total of those 2 amounts, $ 20,831.83, representing a part of the depletion allowance claimed on the partnership return and disallowed by the Commissioner. The disallowance was based upon the following computation:
| Depletion is recomputed and disallowed in accordance with G. C. M. 26290 as | |||
| follows: | |||
| Gross coal sales from property | $ 679,045.83 | ||
| Less: Royalties paid | $ 39,127.16 | ||
| Siding rental | 11,298.96 | ||
| Contract mining | 405,337.64 | ||
| 455,763.76 | |||
| Gross income for basis of percentage depletion | 233,282.07 | ||
| Depletion at 5%, which is less than 50% of net income before | |||
| depletion | 11,164.10 | ||
| Depletion allowed in conference report of November 29, 1950 | 31,995.93 | ||
| Depletion recommended for disallowance | $ 20,831.83 |
*247 All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
Section 23 of the Internal Revenue Code allows a deduction for depletion in the case of mines but refers to section 114 (b) (3) and (4) for percentage depletion allowable under it. Section 114 (b) (4) (A) allows, in the case of coal mines, 5 per cent "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" as the deduction for depletion under section 23 (m). Section 114 (b) (4) (B) defines "gross income from the property." The cost of goods sold and direct costs of producing goods sold are deductible from gross sales in arriving at gross income. Nevertheless, Regulations 111, section 29.23 (m)-1 (f) provides that "'gross income from the property' means the amount for which such product was sold" less the rents or royalties mentioned in section 114 (b) (3) and (4) and numerous cases have been decided in which only rents and royalties paid or incurred in respect of the property have been subtracted from gross sales in arriving at the basis for percentage*248 depletion.
*61 The parties here merely argue whether the corporation obtained an economic interest in the coal in place as a result of the contract entitling it to a deduction for depletion. They seem to recognize that if it did obtain a depletable interest then the Commissioner did not err in eliminating from the partnership "gross income from the property" the amount paid to the corporation. The corporation, under the contract, obtained the exclusive right to mine the coal from the properties of the partnership and was to be paid a percentage of the amount of the gross sales of coal after deducting royalties, siding rentals, and commissions. It thus obtained an economic interest on which it was entitled to depletion under authority of the decided cases. James Ruston, 19 T. C. 284, dismissed (C. A. 4, Sept. 18, 1953). Cf. Morrisdale Coal Mining Co., 19 T.C. 208">19 T. C. 208, 217; J. E. Vincent, 19 T. C. 501, 524, quoting the cited portions of the Morrisdale Coal Mining Co. case. The Commissioner did not err in excluding from the gross income of the partnership the amount paid to the corporation.
*249 The Commissioner also eliminated from the partnership's gross income from the property $ 11,298.96 paid as siding rents. His theory is that that must be excluded under section 114 (b) (4) (A) as rent paid or incurred by the taxpayer in respect of the property. He relies upon Leechburg Mining Co., 15 T. C. 22, in which the lessee was required to pay as rents or royalties 25 cents for each ton of coal mined and shipped, of which 15 cents was for the use of plant machinery and equipment of the lessor. That rental did not include any amount for the use of a railroad siding. Furthermore, the siding here in question did not belong to any of the persons from whom the partnership leased its mining properties but was a separate piece of property to which no mining rights attached. The cited case is not in point and the Commissioner erred in excluding the rentals paid for the railroad siding in computing the deduction for percentage depletion for the partnership.
Decisions will be entered under Rule 50.