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U.S. Supreme Court

Paragon Jewel Coal Co., Inc. v. Commissioner, 380 U.S. 624 (1965)

Paragon Jewel Coal Co., Inc. v.

Commissioner of Internal Revenue

No. 134

Argued March 8, 1965

Decided April 28, 1965*

380 U.S. 624


Petitioner Paragon Jewel Coal Company (Paragon), lessee of coal lands, made substantial investments preparatory to the mining of the coal, but made agreements with contract miners who were actually to mine the coal at their own expense and deliver it to Paragon at a price per ton to be fixed by Paragon. The coal was mined by drift-mining, a costly and time-consuming process. All equipment used by the miners except buildings and connecting roadways could be removed, and several miners, who were not bound to continue, sold their equipment to others. The miners paid nothing for the privilege of mining, they acquired no title to the coal before or after mining, and they took depreciation on their equipment. Both Paragon and the mining contractors claimed a depletion deduction pursuant to 26 U.S. .C. §§ 611 and 613 in computing income taxes, but the Commissioner disallowed both claims. The Tax Court held that Paragon was entitled to the entire depletion allowance. Although, on appeal, the Commissioner then contended that the Tax Court result was right, the Court of Appeals reversed.

Held: Depletion deductions are allowed only to the owner of an economic interest in the mineral deposits. Pp. 380 U. S. 631-638.

(a) Under § 611(b), read in the light of § 631(c), the lessee in a typical lessor-lessee arrangement is entitled to the entire depletion allowance on the gross income from the property. Pp. 380 U. S. 632-633.

(b) Parsons v. Smith, 359 U. S. 215, 359 U. S. 225, sets forth factors to be considered in determining whether contract miners have an economic interest in the coal in place, which are applicable here. Pp. 380 U. S. 633-634.

(c) A Treasury regulation buttresses this conclusion. It provides that an agreement between the owner of an economic interest and another entitling the latter to compensation for extraction does

Page 380 U. S. 625

not, of itself, convey a depletable economic interest, and, having survived successive enactments of the Revenue Code, the Regulation is entitled to great weight. Pp. 380 U. S. 635-636.

(d) In addition the subsequent enactment of § 631(c), when contrasted with §631(b), indicates the intention of Congress that contract coal miners, without more, are not entitled to a tax allowance. Pp. 380 U. S. 636-637.

(e) Commissioner v. Southwest Exploration Co., 350 U. S. 308, based upon a statute requiring upland drill sites for drilling offshore oil and a lease with upland owners providing for a percentage of net profits, is clearly distinguishable. Pp. 380 U. S. 637-638.

330 F.2d 161, reversed.

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