Thomas Coal Co. v. Commissioner

THOMAS COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Thomas Coal Co. v. Commissioner Docket No. 8098. United States Board of Tax Appeals 10 B.T.A. 639; 1928 BTA LEXIS 4059; February 10, 1928, Promulgated *4059 1. Income derived by a non-Indian lessee from a leasehold on the unallotted tribal lands of the Choctaw and Chickasaw tribes of Indians is not exempt from Federal taxation. 2. A corporation operating a mine on leased property and claiming a deduction from gross income of an amount for depreciation based upon an estimated useful life of the mine, and the mine having been abandoned subsequent to the taxable years under review, but before the taxes were finally determined, thereby proving that the useful life of the mine was substantially less than the estimated life upon which the respondent made his determination, is entitled to have its claims for depreciation revised in accordance with the facts. Charles H. Garnett, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. GREEN *639 In this proceeding the petitioner seeks a redetermination of its income and profits taxes for the years 1920 and 1921 for which years the respondent has determined deficiencies of $94.84 and $2,388.86, respectively. The deficiencies result from including in taxable income the income derived from leaseholds on unallotted tribal lands of the*4060 Choctaw and Chickasaw tribes of Indians, which leases were made with the trustees of said Indian nations and approved by the Secretary of the Interior, and in using as the rate of depreciation on plant, buildings and equipment, a rate based on the estimated life of these assets, when subsequent events show the life to be substantially less. *640 FINDINGS OF FACT. The petitioner is an Oklahoma corporation with its principal office at McAlester, and is engaged in the business of producing coal; the renting of miners' houses and the operation of a commissary store. In the year 1917 the petitioner leased certain coal lands from the trustees of the Choctaw and Chickasaw Indian nations. This lease provided for the payment by the petitioner of a royalty on each ton of coal removed, and expired September 25, 1932. This lease was in accordance with the Federal statutes and was approved by the Secretary of the Interior. The seam of coal at the petitioner's mine was known to have a pitch of from 55 degrees to 60 degrees. Both parties have agreed that the development work on the mine was completed in 1918, and the petitioner has accepted the valuation placed by the respondent*4061 on the development, plant and equipment for the purpose of computing the annual deduction for exhaustion, wear, tear and obsolescence. The equipment (the greater portion of which was second hand) was of the usual type employed in a mine in this field. The miners' houses were of the customary box type construction. The hoist and boilers had been replaced between 1918 and the years under consideration. The lease provided that no equipment could be removed at the termination of the lease, so this property would become valueless to the petitioner with the expiration of the economic life of the mine. The years under consideration were the last during which the mine was operated at a profit. The unprofitableness of operating on the pitch of 55 degrees first became apparent in 1922 and on June 30, 1926, the mine was definitely abandoned. The respondent allowed depreciation on the equipment and development work used in connection with the mine, at the rate of 7 1/2 per cent, upon the theory that mining would continue until the expiration of the lease. The petitioner contends that the maximum life of the mine was eight years and that the depreciation should be computed accordingly. *4062 On its return for the fiscal year ending February 28, 1920, the petitioner claimed a probable life of all depreciable assets of 8 1/3 years averaged, and on its return for the fiscal year ending February 28, 1921, the life of buildings was estimated at 15 years, machinery and equipment 8 years, development 8 years, furniture and fixtures 10 years, automobiles 3 years. The respondent has determined the following deficiences: for the year 1920 - $94.84, and for the year 1921 - $2,388.86, making a total of $2,483.70. *641 OPINION. GREEN: The petitioner's contention that the income derived by a non-Indian lessee from a leasehold on the unallotted tribal lands of the Choctaw and Chickasaw tribes of Indians is exempt from Federal taxation, was decided on November 21, 1927, by the Supreme Court of the United States in the case of , in which Mr. Justice Stone said: The power of the United States to tax the income is undoubted. It seems to us extravagant, in the face of the comprehensive language of the statute, to infer that Congress did not intend to exercise that power merely because, in the absence of Congressional*4063 consent, it is one withheld from the states or because the tax in terms imposed on others may have some economic effect upon the Indians themselves. The disposition of Congress has been to extend the income tax as far as it can to all species of income, despite immunity from state taxation. The remaining contention is as to the proper rate of depreciation to be applied to the depreciable assets which were used by the petitioner in its mining operations under this lease. The petitioner points out that it has abandoned entirely its operations under the lease and that therefore the life of the depreciable assets may be accurately determined and the element of estimate entirely eliminated from the computation. In addition it should be pointed out that the petitioner claimed in its return for the first of the years here under consideration an average life of depreciable assets of 8 1/3 years although this claim was not made for the succeeding year. It thus appears that for the first of the years in question the petitioner's estimate of the life of the depreciable assets was under the circumstances remarkably accurate even though it may have been based upon erroneous assumptions. *4064 Such being the case, the right to the correct deduction having been asserted at the time the return was filed, there is no reason whatever for denying the petitioner the right to the deduction merely because he based his estimated life of the assets upon erroneous assumptions. The petitioner did not for the succeeding year claim the same deduction and we must accordingly determine whether for such year the depreciation deduction shall be based upon the then estimated useful life of the assets, or shall be based upon the demonstrated useful life of the assets, the mine having been completely abandoned. In our consideration of this problem we are not in any wise concerned with a revision of the deductions for the years prior to the taxable years here under consideration except to the extent that such deductions enter into the computation of the amount of the petitioner's capital which has not been returned to it through the depreciation deductions. Having before us all the facts so that we *642 are able to compute the deduction on the actual life of the mine as distinguished from the estimated life of the mine, we perceive no reason why such computation should not be made*4065 in the light of the actual facts, and we accordingly hold that such computation should be so made. Our decision in this regard is in accord with that reached in the , and is not in conflict with our decision in , in which case the facts were materially different in that the taxpayer sought to vary the amount of the coal reserves which had been used as the basis for the computation of the March, 1, 1913, value. The parties are in accord as to the value of the depreciable assets and the annual deductions for depreciation will be allowed on the basis of the actual life of the mine. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50. TRAMMELL TRAMMELL, dissenting: I dissent upon the authority of the case of Stouts Mountain Coal Co. v. Commissioner,4 B.T.A. 1292, and Sterling Coal Co. v. Commissioner,8 B.T.A. 549, which, in my opinion, set out principles which can not be reconciled with the present case.