dissenting:
I dissent because I do not think the authorities cited support the proposition that a lessee of coal lands has an economic interest in the coal in place if the lease is terminable upon 80 days’ notice, without cause.
In Parsons v. Smith, 359 U.S. 215, 224 (1959) the Supreme Court stated that terminability upon short notice was one of seven factors which required it to conclude that the taxpayer contractor did not have an economic interest in the coal entitling them to deductions for depletion. The majority has interpreted this opinion to mean that terminability is only one of seven factors that must be balanced in determining whether a taxpayer has an economic interest. This interpretation defeats the purpose behind the “economic interest doctrine”.
“Economic interest” is 'a judicial concept designed to give effect to the substance as opposed to the form of a transaction. Palmer v. Bender, 287 U.S. 551 (1933). It requires that a taxpayer have an economic rather than a legal interest in the natural resource in place. Commissioner v. Southwest Exploration Co., 350 U.S. 308 (1956). The Tax Court and Fourth Circuit were clearly correct in concluding that there is no such “economic interest” where the rights of the taxpayer in the mineral in place are terminable at the whim of the landowner upon minimal notice. Charles P. Mullins, 48 T.C. 571 (1967); McCall v. Commissioner, 312 F. 2d 699 (4th Cir. 1963). I do not think the difference between 30 days’ *859notice and one day’s notice is so great as to warrant a difference in tax treatment as the court intimates. There is nothing in the findings to show that the right to remove coal for 30 days only is of substantial value.
The royalties did not vary according to the market value of coal. It would appear, if that value appreciated, the lessors could terminate in order to preserve to themselves the benefit of the appreciation. If it declined, the lessees could terminate so as to avoid bearing the pecuniary consequences of the decline. If the value of the coal in place in the ground rose or fell according to the market price of severed coal, then the consequences, favorable or unfavorable, of market changes, inured to the lessor, not the lessee.
The court seems to assume plaintiffs fail under only one of the seven criteria used in Parsons, terminability, criterion 3, but they also fail under criterion 4, (p. 225):
* * * that the landowners did not agree to surrender and did not actually surrender to petitioners any capital interest in the coal in place * * *
You do not have a capital interest in what can be snatched away from you without cause.
The expectation that the other party to a contract, profitable to the taxpayer, will not terminate as he has a right to do, has been held to be a capital asset and the loss from cancellation a deductible loss. Parmelee Transp. Co. v. United States, 173 Ct. Cl. 139, 351 F. 2d 619 (1965); Meredith Broadcasting Co. v. United States, 186 Ct. Cl. 1, 405 F. 2d 1214 (1968). It is my opinion that the expectation of the taxpayers here, that the leases would not be terminated, was an intangible asset of the same kind, and not an economic interest in the coal in place.
FINDINGS OF FACT
1. Bakertown Coal Company, Inc., hereinafter “Baker-town,” is a Virginia corporation chartered on April 9,1963, with its principal office at Grundy, Virginia. The corporation was authorized to issue 500 shares of common stock with a par value of $100. During the fiscal years ended *860July 31,1964 and 1965,100 shares were issued and outstanding on the following basis:
William Mack Lester- 10
Bill Ray Lester- 25
Charles R. Lester_ 25
Juanita Lester- 10
Lawrence E. Lester, an infant- 10
James W. Lester, an infant- 10
Sandra Lynn Lester, an infant- 10
Total _ 100
For the same fiscal years, Bakertown filed its Federal income tax returns and paid the tax shown thereon to be due in the respective amounts of $3,803.03 and $4,068.51.
2.Lester Coal Company, hereinafter “Lester,” is a Virginia corporation chartered on April 1, 1957, with its principal office at Grundy, Virginia. The corporation was authorized to issue 500 shares of common stock with a par value of $100. As of the fiscal year ended March 31, 1965, 150 shares were issued and outstanding on the following basis:
Charles R. Lester_ 56
William Mack Lester_ 43
Bill Ray Lester_ 3
James W. Lester, an infant_ 8
Ronald Lester, an infant_ 8
Lawrence E. Lester, an infant_ 8
Sandra Lynn Lester, an infant_ 8
Cherie Lester, an infant_ 8
Tina Rhea Lester, an infant_ 8
Total - 150
3. Lester elected to operate as a small business corporation in accordance with Subchapter S of Chapter 1 of Subtitle A of the Internal Kevenue Code of 1954. It filed a Federal small business corporation income tax return for the fiscal year ended March 31, 1965, and, as a result of the election, its income was taken into account directly by its shareholders.
4. Bill Bay Lester and Jo Ann Lester are husband and wife and are citizens of the United States, residing at Grundy, Virginia. They filed a joint Federal income tax return for the calendar year 1965, and paid the tax shown *861thereon to be due in the amount of $1,879.87. Their infant daughters, Cherie Lester and Tina Rhea Lester, citizens of the United States, filed Federal income tax returns for the calendar year 1965, and paid an estimated tax of $600. Each return showed a tax liability of $410, and each child received a credit in the amount of the overpayment against their estimated tax liability for 1966.
5. Charles R. Lester and Tony Lester are husband and wife and are citizens of the United States, residing at Grundy, Virginia. They filed a joint Federal income tax return for the calendar year 1965, and paid the tax shown thereon to be due in the amount of $18,650.46.
6. William Mack Lester and Juanita Lester are husband and wife and are citizens of the United States, residing at Grundy, Virginia. They filed a joint Federal income tax return for the calendar year 1965, and paid the tax shown thereon to be due in the amount of $13,734.36. Their infant children, James W. Lester, Lawrence E. Lester and Sandra Lynn Lester, all citizens of the United States, filed Federal income tax returns for the calendar year 1965, and paid an estimated tax of $650. Each tax return showed a tax liability of $624, and each child received a credit in the amount of the overpayment against their estimated tax liability for 1966. Ronald E. Lester, also an infant son and a citizen of the United States, filed a Federal income tax return for the calendar year 1965, and paid an estimated tax of $630. His tax return showed a tax liability of $419, and he received a credit in the amount of the overpayment against his estimated tax liability for 1966.
7. Tony Lester, wife of Charles R. Lester, and Jo Ann Lester, wife of Bill Ray Lester, are parties hereto solely because joint Federal income tax returns were filed for the year involved. The remaining individual taxpayers are parties solely because they are shareholders of Lester Coal, a Sulb-chapter S corporation whose income is taxable to its shareholders.
8. During the years involved, Bakertown and Lester were engaged in the drift mining of coal under agreements entitled “ageeemeNT oe lease,” as hereinafter set out. Drift *862mining of coal is an underground mining operation in which a horizontal coal seam is reached by clearing away part of the mountainside with a bulldozer by a process called “facing up” the coal seam. Two parallel tunnels are made into the seam, one for ventilation and the other for working space and removal of coal. The coal is removed as the drift mine is driven into the mountain following the seam. The roof of the mine is supported by leaving pillars of coal in place and erecting wood supports.
9. Bakertown operated under a written agreement entitled “agreembNT oe lease,” dated March 31,1963, between Kentland Coal and Coke Company, Division of the Ber-wind-White Coal Mining Company, a Pennsylvania corporation therein called the lessor, and Bakertown as lessee. In substance, the agreement granted to Bakertown the right and privilege to mine coal from certain designated seams by using methods permissible under state law and acceptable to the lessor. The agreement was terminable at will by either party by giving to the other 30 days’ written notice of its intention to cancel. In the event of cancellation, and if there was no default in payments of the rental and royalty, Baker-town would be permitted 60 days within which to remove any of its property it had placed on the premises. In consideration for the mining privileges, Bakertown agreed to pay a rental fee of $1,000 per month or a royalty of $.25 per ton of coal extracted, whichever the greater. If, 'however, in any one month the quantity of coal mined was insufficient to equal the minimum rental based on the royalty rate then in effect, Bakertown was permitted to mine in future months a sufficient quantity of royalty-free coal to make up the deficit. All coal that was mined belonged to Bakertown which was free to sell it to whomever and at whatever price it chose. The proceeds that it realized from such sales represented the sole source of revenue to which Bakertown could look for recovery of the rents and royalties that it paid under the agreement. The amount of those charges was altogether unaffected by the price that Baker-town received for the extracted coal.
10. Lester operated under two written agreements, each *863entitled “agreement or lease,” dated August 1, 1961 and March 15,1961, between the Kentland Coal and Coke Company, a West Virginia corporation therein referred to 'as the lessor, and Lester as lessee. Both agreements granted to Lester the right and privilege to mine coal from certain designated seams by using methods permissible under state law and acceptable to the lessor. Each agreement was terminable :aJt will by either party by giving to the other 30 days’ written notice of its intention to cancel. In the event of cancellation, and if there was no default in payments of the rental and royalty, Lester Coal would be permitted 60 days within which to remove any of its property it had placed on the premises. In consideration for the mining privileges granted under the contract of August 1, 1961, Lester agreed to pay a rental fee of $500 per month or a royalty of $.25 per ton of coal extracted, whichever the greater. In the case of the March 15,1961 contract, the consideration payable by Lester was the greater of a rental fee of $50 per month or a royalty of $.25 per ton of coal mined. If, however, in any one month the quantity of coal mined under each agreement was insufficient to equal the minimum rental based on the royalty rate then in effect, Lester was permitted to mine in future months a sufficient quantity of royalty-free coal to make up the deficit. All coal that was mined belonged to Lester which was free to sell it to whomever and at whatever price it chose. The proceeds that it realized from such sales represented the sole source of revenue to which Lester could look for recovery of the rents and royalties that it paid under the agreement. The amount of those charges was altogether unaffected by the price that Lester received for the extracted coal.
11. In accordance with the three agreements entitled “agkeemeNT oe lease,” neither Bakertown nor Lester were permitted to assign or sublet the agreements, the estates created thereby, or any interest conveyed, or part with the possession of all or a portion of the premises designated as mining areas, without first obtaining the written consent of the lessors.
12. After execution of the agreements set forth above, *864Lester and Bakertown incurred certain expenses necessary for processing the coal once extracted. Included were the construction and maintenance of tipples, processing equipment, a powerline, and a railroad sidetrack running under the tipple. The tipples erected by both companies were immovable and deductions for depreciation were taken with respect to them during the years involved. Deductions for depreciation were also taken for the years involved with respect to the remaining equipment owned by the companies.
13. Lester and Bakertown did not mine the coal themselves but contracted with independent mining contractors who were to extract the coal at their own expense and deliver it to the companies’ tipples. Lester and Bakertown then cleaned and sized the coal, loaded it into railroad cars, and directed the railroad company to deliver it to the Lester and Baker-town sales agents. Under the contracts between Bakertown and Lester and the contract miners, the latter agreed to mine a specified quantity of coal from designated lands by using acceptable methods for which they would be paid a fixed rate of compensation for each ton of coal extracted and delivered to the tipples. All the contracts were terminable at will by either party by simply giving to the other written notice of its intention to cancel. In the event of termination by either party, the mining contractors were permitted 10 days within which to remove their readily removable equipment, machinery, supplies, and tools from the mining sites. The independent mining contractors could not sell or keep any of the coal that they mined. Thus, as the source of payment for the mining services that they performed, the contractors were obliged to look solely to the personal covenants of Bakertown and Lester as embodied in the mining contracts described herein. Under those contracts Baker-town and Lester did not surrender any economic interest in the coal in place to the mining contractors.
14. By agreement dated April 22, 1963, Bakertown appointed the Berwind-White Coal Mining Company of Philadelphia, Pennsylvania, as its exclusive sales agent. Under the agreement, Berwind-White received a sales commission of 5 percent of the f.o.b. mine price per net ton of *865coal, subject to certain adjustments for purchase discounts. All sales were made for Bakertown’s account and at its market risk.
15. By agreement dated July 21, 1961, Lester also appointed the Berwind-White Coal Mining Company as its exclusive sales agent under terms substantially identical to the agreement with Bakertown.
16. All operating expenses of Bakertown and Lester, other than capital expenditures recoverable by depreciation, including the fees paid to the independent mining contractors, the rent or royalties paid under the agreements entitled “agreement of lease,” and the commissions paid to the sales agents were taken as deductions from gross income on their Federal income tax returns filed for the years involved.
17. On their income tax returns for the calendar year 1965, Bill Bay Lester and Jo Ann Lester, Cherie Lester, Tina Bhea Lester, Charles B. Lester and Tony Lester, William Mack Lester and Juanita Lester, James W. Lester, Lawrence E. Lester, Eonald E. Lester, and Sandra Lynn Lester, all shareholders of Lester Coal Company, a Subchapter S corporation, included in income their proportionate share of income from the company, less their proportionate share of percentage depletion.
18. Upon examination, the Commissioner of Internal Bev-enue disallowed the percentage depletion deductions claimed by Bakertown and Lester, resulting in the assessment of tax deficiencies against Bakertown and the shareholders of Lester.
19. On or about October 30, 1967, Bakertown paid the deficiency resulting from the disallowance of percentage depletion for the fiscal years ended July 30,1964 and 1965, in the 'amounts of $14,387.38 and $7,649.19, respectively, plus interest in the amounts of $2,567.46 and $923.66, respectively.
20. On or about November 13,1967, the taxpayers referred to in paragraph 17 paid the deficiencies assessed against them for the calendar year 1965 resulting from the disallowance of percentage depletion to Lester.
21. On or about March 13,1968, Bakertown and the share*866holders of Lester filed claims for refund in the 'amount of the paid deficiencies as follow's:
Taxpayer Year ended Amount Interest
Bakertown Coal Company, Inc. 7-31-64 $14,387.38 $2,667.46
Bakertown Coal Company, Inc. — .. 7-31-66 7,649.19 923.66
Bill Ray & Jo Ann Lester. 12-31-66 96.09 8.62
Cherie Lester, infant_ 12-31-66 188.00 17.04
Tina Rhea Lester, infant--.- 12-31-66 188.00 17.04
Charles R. & Tony Lester. 12-31-66 3,706.39 334.99
William M. & Juanita Lester. 12-31-66 2,789.67 262.90
James W. Lester, infant. 12-31-66 203.68 18.46
Lawrence E. Lester, infant_ 12-31-66 206.72 18.65
Ronald E. Lester, infant. 12-31-66 188.00 17.04
Sandra Lynn Lester, infant_- 12^-31-65 209.68 19.01
22. No claim for percentage depletion has been made by Kentland Coal and Coke Company, Division of the Berwind-White Coal Mining Company, under the agreements entitled “agkeembNT OK lease” with either Bakertown or Lester. Kentland Coal and Coke Company has, during the years involved, taken deductions reflecting cost depletion attributable to the agreements and it treated the rents or royalties paid by Bakertown and Lester as capital gains derived from the disposal of coal with a retained economic interest pursuant to Section 631 (c) of the Internal Bevenue Code of 1954. No claim for percentage depletion on the coal extracted has been made by the independent mining contractors. The sole claimants to percentage depletion deductions are Bakertown and Lester.
23. The Commissioner of Internal Eevenue has disallowed all the claims for refund by statutory notice sent to the taxpayers. All the requirements for jurisdiction of the court have been satisfied. In the event the taxpayers are entitled to recover, they are entitled to the amounts set forth in paragraph 21, together with statutory interest from November 13, 1967.
CONCLUSION OE LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgments herein, the court concludes as a matter of law that plaintiffs *867are entitled to recover and that judgments should be entered for them in the amounts and for the periods indicated opposite their respective names; such amounts to bear interest as provided by law:
Plaintifl Period Amount
Bakertown Coal Company, Ino. FY 7-31-64 $16,964.84
Bakortown Coal Company, Ino. FY 7-31-66 8,672.86
Bill Ray & Jo Ann Lester. 1966 103.71
Cherie Lester, Infant_ 1966 206.04
Tina Rhea Lester, Infant_ 1966 206.04
Charles R. & Tony Lester_ 1966 4,041.38
William M. & Juanita Lester_ 1966 3,042.47
James W. Lester, Infant_ 1966 222.12
Lawrence E. Lester, Infant_ 1966 224.37
Ronald E. Lester, Infant-1966 206.04
Sandra Lynn Lester, Infant_ 1966 228.69