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Repplier Coal Co. v. Commissioner of Internal Revenue

February 19, 1944


Petitions for review of decision of the Tax Court of the United States.

Author: Goodrich

Before BIGGS, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

The taxpayer and the Commissioner are in dispute concerning certain items of the taxpayer's income tax for the years 1935 and 1936. From the Tax Court's decision, the taxpayer brings two questions to this Court upon petition for review; the Commissioner brings one. The two petitions were heard together and will be treated in one opinion. The taxpayer's objections will be considered first.


The taxpayer is in the business of mining and selling coal. In 1936 it constructed a certain mine tunnel at a cost of $86,394.03. It thus made available for production 394,000 tons of coal, of which it produced and sold some 5,000 tons in 1936. The mind had passed its development stage sometime before 1936. On its tax return, the taxpayer sought to deduct as a deferred operating expense a proportionate part of the cost of the tunnel. The Commissioner treated the cost as a capital expenditure, recoverable only through depletion. The Tax Court found that the expenditure was of a capital nature, and sustained the Commissioner. The taxpayer asks us to reverse the Tax Court on this, and to hold that the cost of the tunnel is deductible in full for 1936 as an ordinary and necessary expense of operation, a position apparently not urged before the Tax Court.

The Revenue Act of 1936 allows a deduction in computing net income of mines, of a reasonable allowance for depletion.*fn1 The allowance is to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. The regulations*fn2 promulgated pursuant to this section require expenditures in excess of net receipts to be charged to capital account recoverable through depletion while the mine is in the development stage. The mine in question was past the development stage. The regulations further provide that expenditures for equipment and replacements thereof, necessary to maintain the normal output solely because of recession of the working faces of the mine and which meet certain other requirements shall be deducted as ordinary and necessary business expenses.

The taxpayer contends that its mine having passed the development stage and having attained an established output, the tunnel construction was only to maintain that output. It offered figures to support this argument and urges that under the regulations the expenditure is to be treated as an ordinary and necessary expense.

We think it clear that the taxpayer's argument at this stage of the litigation is sapped of whatever strength it once might have had, by the recent decision of the Supreme Court in Dobson v. Commissioner of Internal Revenue, 1943, 64 S. Ct. 239. The Tax Court found that the expenditure was of a capital nature. The section of the statute providing for depletion does not specify what expenditures are to be capitalized. The regulations (quoted above), while setting up rules in this respect, do not, as the taxpayer urges, say that all expenditures after the development stage are to be treated as ordinary and necessary expenses. Certain kinds of expenditures are to be so treated. On the other hand, specified expenditures after the development stage, are ordinarily to be charged to the capital account. We find nothing said in the statute or regulations which conflicts with the Tax Court's conclusion that the tunnel expenditure was of a capital nature.

The taxpayer has referred us to numerous accounting authorities for support of its contention. However, in so far as the problem at hand involves rules of accounting, the determination of the appropriate rule of accounting is a matter solely within the Tax Court's competence under the Dobson decision. The amount of he expenditure, the nature of the improvement, its effect on the value of the mine, these and others, are factors for the Tax Court to weigh in determining the accounting rule to be applied. Under the statute and regulations, although a mine has passed the development stage, an expenditure which is of a capital nature is to be treated as such. And, there certainly was sufficient evidence to justify the Tax Court's treatment of the expenditure as a capital item. Since this conclusion of the Tax Court is precluded by neither the statute nor the regulations, it must be accorded by us the finality to which it is entitled under the Dobson decision. Upon this point, the decision of the Tax Court is affirmed.


The taxpayer's second point has to do with the determination of the net income from its mining property for percentage depletion purposes. Under the contract with the miners' union the taxpayer was required to furnish its miners dynamite and miners' supplies, and to rent them mine lamps, at fixed charges to be deducted from wages payable. The taxpayer made a profit on these items of $10,156.25 in 1935 and $9,203.84 in 1936.

The taxpayer elected to deduct depletion on the percentage basis in 1935 and 1936. For the purposes of computing its depletion deduction, the company included in its gross income the profits it made on the items furnished the miners under the contract. The Commissioner excluded these profits and, in computing the net income from the property, he deducted from gross income the full amount of wages to which the miners were entitled under their contract, without deduction therefrom of charges made for supplies sold or rented or profit on these items. Under the Commissioner's treatment, the depletion deduction of 50% of net income was decreased, since the net income decreased. The Tax Court sustained the Commissioner.

The taxpayer does not directly contend that the profits on the items it supplied to the miners should be included in the income from the property. It argues, however, that in computing the net income from the property, the actual amount of money paid the miners, plus the cost to the taxpayer of the items supplied, should be deducted from gross income, not the full amount to which the miners were entitled as wages before deductions were made. The former it says really represents its cost in producing the coal. The Tax Court, in rejecting this contention found that the taxpayer was obligated to pay its employees a fixed amount, a fact not disputed by the taxpayer. It concluded that the essential ...

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