United States v. Swank, 451 U.S. 571 (1981)

United States v. Swank

No. 79-1515

Argued December 9, 1980
Decided May 18, 1981
451 U.S. 571

CERTIORARI TO THE UNITED STATES COURT OF CLAIMS

Syllabus

Held: The "percentage depletion" allowance under §§ 611 and 613 of the Internal Revenue Code of 1954 -- whereby the owner of an economic interest in a mineral deposit is allowed a special deduction from taxable income measured by a percentage of his gross income derived from exhaustion of the mineral -- may not be denied to respondent lessees of underground coal who had the right to extract and sell the coal at prices fixed by them, paying a fixed royalty per ton to their lessors, merely because their leases were subject to termination by the lessor on 30 days’ notice. Pp. 576-585.

(a) The deduction provides a special incentive for engaging in the mining business that goes well beyond a purpose of merely allowing the owner of a wasting asset to recoup the capital invested in that asset, and hence eligibility for the deduction is determined not by the amount of the capital investment, but by the mine operator’s "economic interest" in the coal. The question here is whether the deduction for the asset depleted by respondents will be received by anyone, since the tax consequences of the lessors’ receipt of royalties will not be affected, either favorably or unfavorably, by the decision. Pp. 576-579.

(b) Under their leases, respondents had a legal interest in the coal both before and after it was mined, and were free to sell the coal at whatever price the market could bear. Thus, they had a depletable "economic interest" in the coal deposits, not merely an "economic advantage." Parsons v. Smith, 359 U.S. 215, and Paragon Jewel Coal Co. v. Commissioner, 380 U.S. 624, distinguished. Nor does the right to terminate give the lessor the only significant economic interest in the coal as a matter of "practical economics." It is by no means certain that an increase in the price of coal will induce a lessor to terminate a satisfactory business relationship, and it would be unfair to deny a lessee a tax benefit that is available to competitors simply because he accepted the business risk of termination that his competitors were able to avoid when they negotiated their mining leases. Moreover, the Government has not suggested any rational basis for linking the right to a depletion deduction to the period of time that the taxpayer operates a mine. Thus, the mere existence of the lessors’ unexercised right to terminate respondents’ leases did not destroy their economic interest in the leased mineral deposits. Pp. 579-585.

221 Ct.Cl. 246, 602 F.2d 348, affirmed.

STEVENS, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, MARSHALL, BLACKMUN, POWELL, and REHNQUIST, JJ., joined. WHITE, J., filed a dissenting opinion, in which STEWART, J., joined, post, p. 585.