Usibelli v. Commissioner , 13 T.C.M. 602 ( 1954 )

Emil Usibelli and Rose P. Usibelli v. Commissioner. Emil Usibelli v. Commissioner.

Usibelli v. Commissioner

Docket Nos. 47797, 47798.

United States Tax Court

T.C. Memo 1954-84; 1954 Tax Ct. Memo LEXIS 155; 13 T.C.M. (CCH) 602; T.C.M. (RIA) 54189;

June 30, 1954, Filed

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A. R. Kehoe, Esq., for the petitioners. Gordon N. Cromwell, Esq., for the respondent.

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MURDOCK

Memorandum Opinion

MURDOCK, Judge: The Commissioner determined deficiencies in income tax for 1947 and 1948 of $1,476.69 and $5,648.24. He also determined additions for 1947 of $132.91 and $88.60 under section 294(d)(1) and (2) for failure to file a Declaration of Estimated Tax and for substantial underestimation of Declaration of Estimated Tax. The only issue for decision is whether Emil is entitled to a deduction for percentage depletion in connection with his Alaskan coal mining operations. The facts have been presented by a stipulation, including exhibits, and by Exhibit P, all of which are adopted as findings of fact.

[Findings of Fact]

The petitioners are husband and wife. They filed a joint return for 1948 and Emil filed a separate return for 1947 with the collector of internal revenue for the District of Washington.

Emil was engaged in coal mining operations in Alaska during the taxable years. The Secretary of the Interior of the United States granted special permission to the United States Army on April 5, 1946 to mine coal from specified Government land in Alaska. The permit provided that the Army might contract for the mining of coal for its own use by private parties. The mining here in question was done under the permit and extensions thereof.

The Army entered into a contract with Emil, who had filed a satisfactory bond. The contract was dated July 1, 1946 and was to expire on June 30, 1947. It provided that Emil was to furnish and deliver coal for Ladd Field, Alaska, from the mine at Suntrana, Alaska. The coal was to consist of 40,000 tons of mine run and 30,000 tons of lump nut. Emil was to place the coal on railroad cars at the mine, screened and graded. A minimum of 5,600 tons was to be delivered each month. The total amount to be paid Emil was $362,500, computed at $4.75 per ton of mine run and $5.75 per ton of lump nut. The contract provided that it could be terminated by the Government in whole, or from time to time in part, whenever the contracting officer should determine that such action would be for the best interests of the Government and it provided how settlement would be made in case of termination. The Government could terminate the contract or reduce the specified quantities to be delivered if its requirements should change. The provisions of Article 19 entitled "Price Adjustments" were as follows:

"In the event that during the contract period changes should occur in working hours, wage scales, operating expense, or other conditions of employment which changes are a part of the general revision of such conditions within the producing district where the coal is mined, the parties hereto, upon the request in writing of one to the other within thirty (30) days after the effective date upon which any such change occurs, may redetermine by negotiation the unit price affected, provided that pending such negotiations the contractor shall continue deliveries hereunder. Any price redetermined as herein provided shall be applicable to all deliveries after the effective date upon which the change occurs permitting redetermination as herein provided."

Emil applied for and was granted an increase to $5.47 per ton for mine run in September 1946 and the contract amount was correspondingly increased. The contract was changed in May 1947 to provide that all coal delivered should be mine run and to extend the delivery date to September 30, 1947, later extended to December 31, 1947 due to curtailing of deliveries by the Army.

Emil was invited to bid on the furnishing of coal to the Army for the fiscal year 1948, he submitted a bid on May 15, 1947, and was advised on May 19, 1947 that the Army intended to contract with him to furnish 70,000 tons during the period July 1, 1947 to June 30, 1948 as soon as funds were available.

The President of the United States proclaimed cessation of hostilities on December 31, 1946 and the Army permit to mine the coal would have expired as a result on June 30, 1947 but it was extended to December 31, 1947 and later to the effective date of a lease which might be issued for the lands. Emil had applied for a lease of the lands on May 21, 1947. A lease was granted to Emil in 1949.

The Government, on August 25, 1947, ordered 45,000 tons of mine run, 25,000 tons of lump nut and 30,000 tons of steam and stoker coal to be delivered by Emil, pending the execution of a definite contract. The Army and Emil entered into a new contract dated July 1, 1947 covering the coal ordered on August 25, 1947 to be delivered between July 1, 1947 and June 30, 1948. The amount to be paid Emil was $577,000, computed at $5.22 per ton of mine run and $6.22 per ton for the other grades. The other provisions of the contract were substantially the same as those in the earlier contract. The performance time was later extended to July 31, 1948.

Emil conducted mining operations under the contracts and the order during the taxable years. The Commissioner disallowed claimed depletion deductions of $5,596.54 for 1947 and $8,026.71 for 1948 with the explanation that Emil had no economic interest in the coal in place that he was mining for the United States Army.

The coal belonged at all times to the United States Government. Emil was merely employed on an annual basis to mine and load the coal for use by the Army. The coal was never sold. Emil was paid an agreed amount for the work which he performed. The record does not show that his payments depended upon any sales or market prices of the coal but indicates that they depended upon mining costs. The fact that Emil was applying for a lease is immaterial since he was not a lessee during the taxable years. He could mine only limited quantities of coal and the amount could be reduced by the Government. The contracts could be terminated by the Government under certain circumstances.

[Opinion]

A study of the entire arrangement between Emil and the Army fails to disclose any economic interest held by Emil in the coal in place as would be necessary to entitle him to deductions for percentage depletion. ; ; (June 16, 1954). Cf. ; , reversed in part sub nom. , (April 9, 1954); (April 13, 1954).

Decision will be entered for the respondent.