PARSONS v. SMITH

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Argument of Sherwin T. Mcdowell

Chief Justice Earl Warren: Number 218, Emory W. Parsons, et al., Petitioners, versus Francis R. Smith, Former Collector of Internal Revenue for the First District of Pennsylvania.

And Number 305, George Huss, et al., Petitioners, versus Francis R. Smith, etcetera.

Mr. McDowell you may proceed.

Mr. Sherwin T. Mcdowell: May it please the Court.

In view of the consolidation of these cases, counsel for the petitioners have agreed that each will speak for 25 minutes, reserving with the permission of the Court 10 minutes of the allotted time for rebuttal argument after respondent presents his case which will be made by Mr. Berger.

These cases involved the right of coal operator --

Chief Justice Earl Warren: I suggest you keep track of your own time --

Mr. Sherwin T. Mcdowell: Yes, sir.

I understand that we have.

Chief Justice Earl Warren: -- because we can't do that for you.

Mr. Sherwin T. Mcdowell: Thank you, sir.

These cases involved the right of coal operators engaged in the business of strip mining coal to present its depletion under the Internal Revenue Code.

This is not only the first case involving strip miners to come before the Court, but to our knowledge, it is the first case ever to come before this Court in which the right of the person actually producing the minerals to depletion was ever challenged.

The facts in both cases are essentially the same.

I will state the facts in the Parsons case and due to the extent there are differences, Mr. Berger will state them in the Huss case.

Perhaps it would be helpful to consider briefly the operation known as "strip mining."

A strip miner mines from the surface of the earth.

Unlike a deep miner, he does not drive shafts into the earth to reach the coal.

Basically, the operation is performed by removing the earth which lies over the coal known as "overburden."

This overburden is removed by making massive cuts in the earth.

The overburden from one cut being deposited into the adjacent cut from which the coal has already been removed.

The operation resembles to a degree plowing a field except that the furrows may be as much as 200 feet deep.

Strip mining of course, is feasible only where the coal does not lie at too great a depth beneath the surface, and also the thickness of the seam of coal has a bearing because it is profitable to remove more overburden to reach a thick seam than a thin one.Seams of coal do not lie or run at a uniform depth beneath the surface.

They may crop, fault or pitch.

Coal crops when it comes to the surface of the earth.

It faults where the vein is cut off beneath the surface usually by a rock upheaval, and it pitches where it goes into the earth at a sharper incline.

The overburden is removed in several ways, by scrapers which are the ordinary road scrapers with which one is generally familiar by high-lift shovels which are basically the standard form of steam shovel with a little longer boom to enable the bucket of the shovel to be raised to a greater height.

In other words the high-lift shovel in effect digs itself down into a hole in order to reach the coal.

And lastly, coal is removed -- overburden is removed by the use of draglines.

These vary in size but basically, they're all the same.

They operate on the same principle.

They consist of a machinery housing and a long boom perhaps 60 to 135 feet from which is suspended a huge bucket by a cable.

This bucket is capable of removing great quantities of earth at one scoop.

Justice John M. Harlan: To what extent is the equipment that you use you need for strip mining?

Mr. Sherwin T. Mcdowell: Well, sir --

Justice John M. Harlan: As distinguished from its use -- usability and generally in other types of operation?

Mr. Sherwin T. Mcdowell: Well, I think a fair answer to that, sir, would be that bulldozers, scrapers, trucks may generally be used in -- in road building and in other instances where it is necessary to remove quantities of earth.

A dragline is generally limited to a stripping operation, although where it would be necessary to remove great quantities of earth in a road building operation, I presume that a dragline would be used for the purpose.

Draglines are customarily used in coal stripping because of the fact that they do remove great quantities of earth with one scoop or bite, and also because they can work at practically any depth because of the fact that their limitation really is only the extent of the cable --

Justice William J. Brennan: You've defined things so well.

Would you define the dragline?

Mr. Sherwin T. Mcdowell: Sir?

Justice William J. Brennan: The dragline.

Mr. Sherwin T. Mcdowell: A dragline?

Justice William J. Brennan: So it's just -- is that the word -- that was used?

Mr. Sherwin T. Mcdowell: Yes, sir.

D-R-A-G-L-I-N-E.

Justice William J. Brennan: What's that?

Mr. Sherwin T. Mcdowell: Well, I -- I think, if I may, that the definition comes from the fact that there's a long boom with a cable and a bucket is suspended from it.

The bucket is dropped into the hole in the earth.

The machinery draws it back up.

In other words, it drags it up on the --

Justice William J. Brennan: It's all a (Voice Overlap) --

Mr. Sherwin T. Mcdowell: -- cable line.

Justice William J. Brennan: Okay.

Mr. Sherwin T. Mcdowell: Once the overburden has been removed exposing the coal, the coal is cleaned, loosened and placed usually by dynamiting so that it may be removed from the vein.

This removal is accomplished by placing a loading shovel, which is generally a steam shovel on the coal in place bringing trucks down into the cut and loading the trucks with the steam -- with the steam shovel.

It's obvious of course, that roads must be built for this operation not only to enable the strip miner to move his heavy-duty equipment in but also to enable the coal to be hauled out in trucks.

In the Parsons case, the partnership Parsons mined the coal under an oral contract with Rockhill Coal Company, the owner of the land.

This contract, is what is known in the industry as a salvage contract, that is to say, Parsons bore all the expenses of the operation and furnished the equipment and received payment only if it was successful in discovering and extracting marketable coal.

Parsons was paid a stated price per ton by the coal company on whose lands they were operating.

The contract was terminable on 10 days notice by either party, but if the contract was terminated, Parsons had the absolute right to remove and be paid for all coal which he had uncovered even though that took more than 10 days.

Parsons had the exclusive right strip areas allocated to it.

Parsons controlled the amount of equipment, the number of workers used in the job, and the quantity of coal to be stripped.

The value of the equipment used on the job by Parsons ranged from $60,000 in the four-part of the operation to as high as $250,000 in the latter part of the operation.In fact, Parsons' agreement was never terminated by the landowner.

Parsons stripped on the landowner's land continuously for over eight years.

The stripping ended when Parsons gave the landowner notice that it intended to cease operations after 30 days if that was satisfactory.

Justice John M. Harlan: The right to terminate, was it mutual (Inaudible)

Mr. Sherwin T. Mcdowell: Yes, sir, it was mutual.

After giving the notice which -- 30 days which was satisfactory to the landowner, Rockhill, Parsons ceased operation about five weeks later, which was the time required to remove the coal it had been cleared of overburden.

The petitioners brought suit upon rejected claims for refund of federal income tax for the years 1945 through 1949.

The District Court and the Court of Appeals for the Third Circuit concluded that they were not entitled to depletion and it is this conclusion which is before this Court for review.

At the outset, I think it is important to note that the petitioners here seek only a share of the depletion, not all of it.

This is so because the statute provides for a deduction of a -- for depletion in the form of a flat percentage of gross income from the property which is defined as the gross income from mining.

There is no dispute here as to the gross income from mining.

The dispute is whether the strip miner who mined the coal is entitled to percentage depletion on his share of that gross income from mining.

Assume, for example --

Chief Justice Earl Warren: What is that share, Mr. -- as you see it, Mr. --

Mr. Sherwin T. Mcdowell: That share is the price per ton he received from the landowner for the coal.

In other words, his gross income from mining, Your Honor, would be -- if he will pay $1.50 a ton as he was here the price was varied upward, but his gross income from mining in respect of that ton of coal would be what he was paid for it.

Justice John M. Harlan: What would be the share the owner would get?

Mr. Sherwin T. Mcdowell: Well, perhaps I could handle that by an example, sir.

A little easier than using the actual figures but the principle is the same.

Let us assume that the landowner sold the coal for $4 a ton.

Now, that's the gross income from mining because at that point, the coal goes off the market.

Let us also assume that the landowner paid the strip miner who mined the coal $2 a ton.

The question is whether the landowner is entitled to percentage depletion on $4 and the strip miner nothing.

Or whether the strip miner is entitled to depletion on $2 which is his gross income and the landowner on the remaining $2 of the gross income from mining after deducting what he has paid the strip miner for the coal.

So that it is a question of sharing the depletion not endeavoring to increase the depletion dollar above $1 --

Justice William J. Brennan: (Voice Overlap)

Mr. Sherwin T. Mcdowell: I beg your pardon, sir?

Justice William J. Brennan: (Inaudible) -- what did he get -- on your example, did he get it on $4 or $2 or --

Mr. Sherwin T. Mcdowell: Yes, Your Honor.

We are informed that he got it on $4 in my -- using my example.

Justice William J. Brennan: Yes.

Justice Potter Stewart: So the -- the total amount of depletion, of the -- of the depletion deduction would be the same in either case.

It would be 5% of $4.

Mr. Sherwin T. Mcdowell: Yes, sir, that is right.

Justice Potter Stewart: So that assuming that -- which is the --

Mr. Sherwin T. Mcdowell: And all we ask is a share of the 5% of $4.

Justice Potter Stewart: Which would make sense, I guess.

Mr. Sherwin T. Mcdowell: We're not asking -- I beg your pardon, sir?

Justice Potter Stewart: If my arithmetic is right, that's 20 cents --

Mr. Sherwin T. Mcdowell: 20 cents, yes, sir.

Justice Potter Stewart: Not -- and the only question is whether you take a dime of the depletion per ton and the owner takes a dime, or whether he gets full 20 cents.

Mr. Sherwin T. Mcdowell: That is precisely it, sir.

Justice Potter Stewart: And then --

Mr. Sherwin T. Mcdowell: But it will never be more than 20 cents.

Justice Potter Stewart: Right.

Mr. Sherwin T. Mcdowell: Now however --

Justice Potter Stewart: It's more than 5% of the gross income.

Mr. Sherwin T. Mcdowell: That is correct.

Justice Potter Stewart: Now, did that --

Mr. Sherwin T. Mcdowell: That's how the pie is cut up.

Justice Potter Stewart: So, generally speaking, the -- the Government's position here is that of a stakeholder except insofar as the owner and the -- and the strip mine contractor, whatever -- whatever your client is called, might have different -- might be taxed to different rates, is that right?

Mr. Sherwin T. Mcdowell: Yes, that is -- that is essentially correct, sir.

Chief Justice Earl Warren: Suppose --

Unknown Speaker: (Inaudible)

Chief Justice Earl Warren: Oh, pardon me?

Suppose your -- your client employed an independent contractor to do a certain portion of his -- his job such as the trucking or loading cars or something of that kind, would he be entitled to a share of the depletion?

Mr. Sherwin T. Mcdowell: In our view of the case, he would not, Your Honor, for the reason that he would not be engaged in mining.

We were engaged in mining but someone that may be hired as an employee or may perform part of the process subsequent to the actual mining is not engaged in mining and therefore would not be entitled to depletion.

Chief Justice Earl Warren: Well, then if -- if that portion of your -- of your obligation under the contract is not mining, how would you be entitled to a depletion?

Why should you be entitled to a depletion for that portion of your -- of your work?

Mr. Sherwin T. Mcdowell: Well, because the statute Your Honor does not -- does not require a division of the portion of the work that is performed.

If we are in the business of mining, we derive gross income from mining by the whole of the operation that we perform.

And our gross income from that Your Honor is as we see it, what we get paid per ton for the coal which we deliver after we discover it.

Chief Justice Earl Warren: Where there is mining or not?

I mean, on those parts of the operation, your operations that are not mining, you're entitled to -- according to your theory, you're entitled to depletion on that the same as you are on the portion that does constitute mining?

Mr. Sherwin T. Mcdowell: Well, I -- if I may put it this way, Your Honor, I think it is all mining for two reasons.

One, as a matter of fact, that is to say that delivering the coal to the tipple is part of the mining but beyond that there is a very elaborate statutory definition of the process of mining which includes a number of treatment processes going beyond the actual process of digging the coal out of the ground so that on either score, as I see it, the whole of it would be mining, the whole of what we did.

Chief Justice Earl Warren: But if you parceled any of that out to anybody, it -- they would not be entitled to any depletion.

Mr. Sherwin T. Mcdowell: Well, I would have some hesitancy to making of a -- a flat agreement because I think that it would depend in part on how that was done.

But to the extent it was done simply by virtue of our engaging somebody to perform part of it, my answer would be, "Yes, sir.

They are not entitled to -- to depletion."

Now, of course whether the strip miner is entitled to this share of depletion we seek depends upon whether he has under the decisions of this Court an economic interest in the coal in place.

First, we should observe that economic interest does not mean legal title to or ownership of the coal.

Indeed, the term "economic interest" includes, as this Court has held in Palmer against Bender, every case in which the taxpayer is acquired by investment, any interest in the mineral in place and secures by any form of legal relationship income derived from the extraction of the mineral to which he must look for a return of his capital.

This principle was most recently restated by this Court in the Commissioner versus Southwest Exploration Company.

In that case, a -- an oil operator, got a lease from the state to drill for offshore oil.

As required by a state law in the absence of an artificial -- a natural or artificial drilling island from which he could drill, he secured the right from the adjacent upland owners to erect drilling equipment on their lands and by the process known as "whipstock drilling" reach the offshore oil.

He agreed to pay the upland owners a stated percentage of his net profits for the right to use their land.

The issue before this Court was whether the upland owners had an economic interest in the offshore oil.

This Court held that they did, that the upland owners' contribution, their land, was an investment in the oil in place sufficient to establish their economic interest.

Their income was dependent solely upon production and the value of their interest declined with each barrel of oil produced.

Justice John M. Harlan: Wasn't -- wasn't that a situation in which the taxpayer who -- the landowner had land which was -- could only be used -- there wasn't any other land that could be used for this offshore drilling, was it?

Mr. Sherwin T. Mcdowell: Well, if I might answer that this way, Your Honor.

Actually, there were contracts made there in that case with five upland owners.

Actually, the land of only three were used to reach the oil so that -- I think it is fair to say that while the upland owners were essential as a class, no single one of them was essential to -- to make it possible for the oil deposit to be reached.

The requirements as we stated in the Southwest case may be summarized as follows.

There are three.

First, the taxpayer must apply by investment an interest in the mineral in place.

Second, he must derive income solely from production.

And thirdly, his interest must decline with production.

The petitioners here urged that we meet precisely these requirements.

First, by the contracts, we acquired an interest in the coal namely, the right to mine it, and be paid for it.

This interest like the interest of the upland owners in the Southwest case was essential to the mining operation.

Justice Charles E. Whittaker: Can I ask you as to their --

Justice John M. Harlan: Yes, sir.

Justice Charles E. Whittaker: (Inaudible) the coal and the right to be paid for it.

Now, what do you mean, paid for the coal or for the mining?

Mr. Sherwin T. Mcdowell: The right to be paid for the coal, Mr. Justice Whittaker, when after we mined it.

In other words, we took the risk of discovery and after we got marketable coal above the ground and delivered it to the landowner, we were paid for that coal.

So I was -- when I said "it" I meant coal.

Yes, sir.

Justice Charles E. Whittaker: Do you have any title as such to the coal?

Mr. Sherwin T. Mcdowell: No, sir.

We had no title as such to the coal.

Justice Charles E. Whittaker: And now do you get paid for the work, were you not?

Mr. Sherwin T. Mcdowell: No, sir.

I do not think we were being paid for work because you have to have regard for the circumstance under which this arrangement arises.

In other words, we received absolutely no pay unless, under the salvage contract, unless after furnishing all of the equipment and doing all of the work we found coal that was marketable and delivered it to the owner.

Our position is that the contribution of the strip miner who does the mining is equally essential -- equally as essential as the contribution of the landowner --

Justice William J. Brennan: May I ask you as to the --

Mr. Sherwin T. Mcdowell: Yes.

Justice William J. Brennan: Do you put any label to that interest?

Mr. Sherwin T. Mcdowell: I beg your pardon?

Justice Hugo L. Black: You put any label on this (Voice Overlap) --

Mr. Sherwin T. Mcdowell: To the contribution?

Justice William J. Brennan: To the interest that you acquired?

Mr. Sherwin T. Mcdowell: No, sir.

I -- my answer would be, I don't think a label is necessary because the Court has said by any equal relationship and we were not trespassers.

We were in there as of right so that I don't know that it's necessary to define the -- the -- by label the right that we had under our contract.

I would not regard it as important to do that, Your Honor.

Justice William J. Brennan: Well I -- I'm thinking about Mr. Justice Whittaker's question to you.

You said that you had "an interest" in the coal as I understood it, is that right?

Mr. Sherwin T. Mcdowell: Yes, sir.

Justice William J. Brennan: An interest in the coal.

Mr. Sherwin T. Mcdowell: Yes, sir.

Our position is that we had an interest in the coal in the same -- in the same way in which the upland owners in the Southwest case were regarded as having an interest in the offshore oil that was out beyond their -- the actual line of their ownership.

Justice Charles E. Whittaker: (Inaudible)

Mr. Sherwin T. Mcdowell: Yes, sir.

Justice Charles E. Whittaker: (Inaudible)

Mr. Sherwin T. Mcdowell: Well, Mr. Justice Whittaker, I think the answer is this, that the Court held that the upland owners had an economic interest in the oil in place.

There is a -- there is a quotation from the Southwest case which I think is --

Justice Charles E. Whittaker: (Inaudible)

Mr. Sherwin T. Mcdowell: All right.

But you will find in there, sir, a statement to the effect because under the law as it has developed in this Court under these economic interest decisions, the ultimate conclusion is that the man who has a depletable interest has an economic interest in the mineral in place.

The second requirement of the three I summarized, namely, that our income must be dependent upon production is clearly met here, and as we understand it, the respondent has conceded that.

And the third requirement, namely, that the interest must decline in value as the coal is exhausted is likewise met here because with each ton of coal removed, the strip miners were that -- there remained that much less coal from which the strip miners might thereafter derive income.

We believe that perhaps an apt way of demonstrating our position that the strip miners in this case had an economic interest in the coal in place is to paraphrase the words of this Court in the Southwest case and substitute the word "strip miners" for the word "upland owners" as used in that case.

Here, the strip miners chose to contribute their organization and equipment to the coal-stripping venture in return for income based upon production.

This contribution was an investment in the coal in place sufficient to establish their economic interest.

Their income was dependent entirely upon production and the value of their interest decreased with each ton of coal produced.

No more is required by any of this Court's decisions.

Justice Hugo L. Black: In my recollection directly, they were indispensable to this -- to the work they've done there and their property was indispensable --

Mr. Sherwin T. Mcdowell: Well, Mr. Justice Black, their property was indispensable as a class and if -- if I may -- if I may, sir --

Justice Hugo L. Black: Well, could it have been produced without excess to and from their property?

Mr. Sherwin T. Mcdowell: As a practical matter, no, because it would've been too expensive, apparently.

Justice Hugo L. Black: You, in your case.

Mr. Sherwin T. Mcdowell: Yes, sir, we -- it takes a coal stripper to --

Justice Hugo L. Black: I understand that.

Mr. Sherwin T. Mcdowell: -- produce this coal.

Justice Hugo L. Black: There, this was a part of the setup itself.

It was a -- he had an asset there and that he was a part of it just as much as though he was --

Mr. Sherwin T. Mcdowell: Well --

Justice Hugo L. Black: And there are other men on -- over -- on that land.

Mr. Sherwin T. Mcdowell: Except this one -- this one fact, sir, which I understand from the case there were five upland owners from whom drill sites were secured and ultimately, wells were drilled on the land of three, so that the oil deposit to the extent of the oil operator desired to reach it was reached from the land of three not the original five upland owners.

Justice Tom C. Clark: Upland owners though was a party to the lease arrangement.

Mr. Sherwin T. Mcdowell: As I understand it -- as I understand it, Mr. Justice Clark, he was not a party to the lease arrangement which the oil operator made with the state.

The record in that case, I believe, discloses that it was stipulated indeed that he had no interest in that lease.

Justice Tom C. Clark: The endorsements though in the application (Inaudible)

Mr. Sherwin T. Mcdowell: Well --

Justice Tom C. Clark: The thing is he was going to press the land which is necessary --

Mr. Sherwin T. Mcdowell: Yes, that --

Justice Tom C. Clark: -- if the State gave it.

Mr. Sherwin T. Mcdowell: That is -- that is correct sir, because as I understand that the State required him or required the oil operator to demonstrate that he had a drill site, so he brought his agreement in.

Justice Hugo L. Black: He owned the part of the assets as I recall it.

I have read it.

He owned the part of assets which were indispensable for the production of that oil.

And the more oil that is produced, the less his land would be worth, so it's wasted away.

Mr. Sherwin T. Mcdowell: But of course you understand, Mr. Justice Black, that he didn't sit over and owned any of the oil as such.

Justice Hugo L. Black: I understand that.

Mr. Sherwin T. Mcdowell: His land was here and the oil was offshore.

Justice Hugo L. Black: He owned the part -- he owned the part of the property that was indispensable for the production of the oil.

Suppose if -- if the company had owned all that, they would've used it just as it did.

Mr. Sherwin T. Mcdowell: Yes, sir.

Yes, sir.

Well, I -- that is -- that is -- that is correct.

He -- he owns something which in those --

Justice Hugo L. Black: He -- he actually sustained a law in connection with the assets that were utilized both for the production over the properties.

Mr. Sherwin T. Mcdowell: But we maintain, Your Honor, that we did here too because with each ton of coal produced, our right to produce coal under this arrangement necessarily declined.

Justice Hugo L. Black: What about a coal miner?

Mr. Sherwin T. Mcdowell: You mean an -- well --

Justice Hugo L. Black: You have the coal miner.

Mr. Sherwin T. Mcdowell: Well,

Justice Hugo L. Black: -- he -- he have an interest to that extent, wasn't it?

Mr. Sherwin T. Mcdowell: No, sir.

A coal miner would be, in our view of the matter, Mr. Justice Black, an employee, he would not be engaged in the business of mining for his own account as these strip miners were.

Justice Hugo L. Black: If it was his own account, he'd get some wages for that.

Mr. Sherwin T. Mcdowell: Well, if -- well, to that extent, yes, right -- right so.

Justice Hugo L. Black: He loses that interest.

If he loses -- if there -- all that's depleted, he loses his job.

Mr. Sherwin T. Mcdowell: Yes, but he is not deriving gross income from mining sir, in the sense that he is engaged in the business of mining as an entrepreneur.

He's an employee.

Unknown Speaker: Right.

That -- that would be a valid distinction.

Mr. Sherwin T. Mcdowell: I would like to make just one point, if I may, and that is with respect to determination clause in this contract.

I direct the Court's attention to the fact that it was under our contract agreed that if 10-days notice was given, Parsons had the absolute right to take out all the coal it had been uncovered irrespective of how long that required.

So that as to the coal which was actually removed and the coal with respect to which depletion is sought, our contract in fact was not terminal because the minute the overburden was removed, that coal was coal which could not be taken away from us by termination and that was coal which we had the absolute right to take out, and sell to the landowner for the stated price.

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Argument of David Berger

Chief Justice Earl Warren: Mr. McDowell, you may proceed.

Mr. David Berger: Mr. McDowell has concluded his argument, Mr. Chief Justice Warren.

Chief Justice Earl Warren: Oh, of course, I -- Mr. Berger.

Mr. David Berger: May it please the Court.

I represent the petitioners, Huss, were a partnership were engaged in essentially the same kind of stripping and mining operation which was described by my colleague, Mr. McDowell.

Now, we naturally agree with his outline to Your Honors of the law.

And it is our position that the statute which is here involved as a matter of law entitles the petitioners to the depletion allowance.

And we have printed the statute in our appendix at page 20 of our brief and in very plain language defines the gross income as to which the 5% depletion allowance shall be made as gross income from mining.

It is therefore our position that on the facts of this case unchallenged, I may add, that the petitioners, Huss, derived over $1.5 million of gross income for the years 1944 to 1947, inclusive from mining and therefore, are within the plain language and the plain meaning of the statute entitled to the depletion allowance.

A question was asked from the bench this morning as to what if any label might have been attached to the interest of the parties, the petitioners here?

To the extent that we have written contracts in this case, the Huss case differs factually from the Parsons case, which you will recall, was based on oral -- an oral arrangement.

But at page 89 of the record, Your Honors --

Justice John M. Harlan: There was no suggestion that in other cases the -- the contract wasn't intended (Inaudible)

Mr. David Berger: Oh no, sir.

No sir.

It's just that I think for the enlightenment of all of us, it would be well to refer very briefly to the written contract which was one of six executed by Huss in this case and which I think very clearly demonstrates and indeed beyond for adventure of doubt, that the stripping and mining operations which produced the income here were mining operations within the meaning of the statute.

Now, the contract was a contract and this is the label put on it by the coal company, owner of the land, and drafted by the lawyers for the grantor of the interest which we had here.

It says, “A contract for,” and I'm quoting, “stripping and mining the various veins on the north and south depths of the Tower City section.”

And then it goes on to describe what the project is as a salvage stripping project, and at page 92 of the record it says, “Salvage stripping as used herein shall be deemed to mean a project wherein coal company reserves a coal-bearing area for contractor, gives contractor permission to enter upon this area and strip it and agrees to pay contractor a specified amount of money for each ton of raw coal that he delivers to coal company.”

And then it goes on to say that the coal company assumes no responsibility for the discovery of coal, gives the contractor no guarantee of the quantity of coal in the stripping area, and places upon contractor all risk in connection with the prospecting, discovery, and recovery of coal in the operation of the entire stripping project.

It goes on to require Huss to perform all work required for the prospecting, discovery, and recovery of all coal, the removal of overburden, and for the delivery of raw coal into the raw coal chute.

And then it expressly defines on page 94 the scope of the work as understood by the parties to refer to everything required too.

Now, these are the keywords, extract, process, and deliver into the raw coal chute at Westwood Breaker or of the raw coal that is recoverable by stripping.

And so we have, Your Honors, an agreement under which the owner of the coal land has reserved that coal-bearing track for the contractor, and has actually given to the petitioner in this case an exclusive right to strip and mine the coal, to recover all the coal recoverable, and requires itself to pay by taking all of his output only for the coal.

Justice John M. Harlan: Did you have a cancellation clause?

Mr. David Berger: Yes, Your Honor.

There was a cancellation clause in our written agreement.

We are not in accord with the finding of the trial judge in this case who said that this cancellation clause was operable solely within the discretion of the coal company.

We think the record shows that on the contrary, that before Huss moved his very substantial equipment, worked in the end approximately $500,000, he asked at the beginning whether or not this clause which apparently permitted a -- an unqualified termination applied to him.

And he was advised that it didn't because it was something that was put in there as a precaution to protect the coal company against unsatisfactory strip miners.

Justice Hugo L. Black: What clause is that?

Mr. David Berger: That clause was clause -- well, it's --

Justice Hugo L. Black: Well, I -- I didn't --

Mr. David Berger: Well, it's --

Justice Hugo L. Black: -- take -- take your time.

I've looked at it.

Mr. David Berger: It -- we have a clause.

It's a finding of fact, Your Honor.

Justice Hugo L. Black: What they admin in the contract?

Mr. David Berger: It -- it's in there.

There's no question about it.

Justice Hugo L. Black: Is that under 30 -- on page 34 which says reading in its discretion.

Mr. David Berger: Yes.

That would be in the finding of fact.

Finding of fact number --

Chief Justice Earl Warren: Well, that's a finding of fact.

Mr. David Berger: Yes, that's a finding of fact.

What page is it, 90?

Oh, on page 98, my colleague advises me, Article 23.

Now, it's rather lengthy but this is the point that we make in that regard.

We have a dual point.

First, that in respect to the cancellation clause, if you read this agreement through and I'm sure, Your Honors' leisure will -- your leisure will be able to do that, you will see that there -- the contractor was under an obligation to begin work within 30 days.

Now, the record shows that he was required and also under the contract to strip out and mine out all of the coal that is recoverable.

Now then, it is our position that the practice of the parties in respect to the six contracts in the Huss case demonstrates that they did not regard this as being in arrangement unilaterally terminable by Reading.

But on the contrary, and the record shows this, Your Honor, there are six written agreements of cancellation, each one covering each of the six contracts.

Now, however, so there'll be no doubt as to the position of Huss, we say that while that clause was not applicable to Huss even if it should be regarded by this Court as applicable to Huss, that that would not deprive Huss of the right of depletion.

And we are relying upon the reasoning and the language of this Court in the Uplands case to which reference was made.

Now --

Chief Justice Earl Warren: Well, what are you going to do with finding number 30 that on page 34 which said reading in its discretion could entirely cancel and terminate the contracts prior to the completion of the stripping by giving 30 days written notice --

Mr. David Berger: Yes.

Chief Justice Earl Warren: -- to the plaintiffs of his intention to do so.

Mr. David Berger: I have -- I -- I agree, sir, that the -- the trial judge found that as a fact.

I maintained that under Rule 52 (a) that that's a clearly erroneous finding because if one reads the cancellation language in connection with the other provisions of the contract and with the practice of the parties, which in this case was that in no single instance had there been a unilateral termination.

But on the contrary, there had been written agreements of cancellation that one should infer, as Judge Kalodner indicated in his dissent that that clause really was inapplicable to Huss.

Chief Justice Earl Warren: Well do you -- do you contend that Article 23 in the contract, the suspension of work is ambiguous or uncertain (Voice Overlap) --

Mr. David Berger: Yes, Your Honor.

I certainly do.

Chief Justice Earl Warren: (Voice Overlap) --

Mr. David Berger: And I've made -- I tried this case, Your Honor, and that was the very point I made with Judge Van Dusen.

Chief Justice Earl Warren: I haven't read it.

Mr. David Berger: Now, I know that.

That was the main -- that was the point I maintained.

And Judge Van Dusen, if Your Honor will look at the opinion he wrote, took the position that I failed to sustain my burden of proving a variance from what he call a written provision of the contract.

I think that was error of law and we've maintained in the Court of Appeals that it was wrong and on the petition for rehearing, we pointed out specifically, that the Court of Appeals made a mistake as to the content of the record because Judge Hastie said, “The record doesn't indicate why the cause was put in.”

But we pointed out, and Judge Kalodner made note of that in his dissent why it was put in.

However, regardless of that question of facts, sir, we strongly urge that we were entitled to the depletion allowance because we did the mining here.

Now, let us analyze for a moment the import, if any, of this cancellation clause assuming arguendo that we are bound by it.

First of all, it was a 30-day notice provision.

Now, the record shows, and this is undisputed, that Huss mined so extensively that on occasion, he had 50,000 tons of coal on the surface and that coal, of course ultimately, he delivered to Reading for which he received the stated price per ton.

Now, certainly no one can deny that while that clause remained unexercised that he, Huss, had a right to mine the coal.

And the contract is clear that had the coal which was on the surface been destroyed by fire or flood or by some other catastrophe, that Huss would have suffered the loss and not ready because Huss was not entitled to one penny unless he stripped, and mined, and delivered the coal, all of the coal to the raw chute, or to the chutes of the coal company.

But I say that there's a more important reason why the cancellation clause is inoperative here as a matter of law, and that is that in point of fact, it never had been exercised.

And we must consider the question of tax liability and our rights as of the time when the end of the tax year occurred.

Now, we have four years in question here, Your Honors, 1944 to 1947 inclusive.

It is a fact that Judge Kalodner pointed out that at the end of 1944 when we had a gross income of $520,000 from our stripping mining operations that this clause had not been exercised.

And therefore, I strongly contend that we were entitled to take a 5% depletion allowance.But more important, it never was exercised.

We actually mined the coal to exhaustion and Judge Van Dusen so found.We had the control as he finds in his extensive findings of fact.

We had the control of the mining operation.

Now, we've come back to the question of terminability.

In the Fourth Circuit where this question had come up or where there was no doubt that the terminability clause applied --

Justice John M. Harlan: Was all the coal been mined that was involved in this case, mined to exhaustion?

Mr. David Berger: Yes, Your Honor.

Justice John M. Harlan: All of it?

Mr. David Berger: Yes, Your Honor.

In fact we exhausted these tracks, Your Honor, and when we finished the mining, each time we finished it, we entered into a written agreement with the coal company cancelling the agreement.

And as a matter of fact, it took us some three years roughly to mine out and exhaust all of the coal here.

Justice Charles E. Whittaker: (Inaudible)

Justice John M. Harlan: Yes, Justice Whittaker.

Justice Charles E. Whittaker: Is the possibility of whether or not to be as such an interest as the plaintiff (Inaudible) depletion amount dependent upon what did happen?

In fact or on economic interest (Inaudible)

Mr. David Berger: I think it is dependent upon both, sir.

I say, first, that is dependent upon economic interest; that we had an economic interest the minute we entered into the contracts with Reading.

We were granted an exclusive right to mine.

Coal lands, Your Honors, have no economic value absent the right to mine the coal.

So we had that economic interest.Moreover, for its entire income was derived solely from the extraction and delivery of the coal.

For example, if we had spent $1,000,000 removing overburden and had come up with nothing but slate, we would not have been paid one penny, Your Honor.

Now, as to the terminability, I say it is what actually happened that counts, and this Court says so.

I rely on the Southwestern Exploration case wherein this Court declared that many things might have happened.

For example, the contractor, the oil driller in the southwest case might have built an artificial island and used that and that was perfectly proper under the existing law.

He didn't do it.

There were five upland owners.He might have selected another upland owner.

He did not select another one.

He selected the taxpayer.

And this Court declared, as Mr. Justice Clark undoubtedly recalls, but none of these possibilities occurred.

Tax viabilities are rights depend upon realities.

Justice Tom C. Clark: But he could select not -- the owners regard (Inaudible)

Mr. David Berger: He had his choices.

I understand the fact, sir, among several upland owners.

He also had a choice, sir, of building an artificial island from which he could drill the oil in accordance with California law.

Moreover, it was argued in that case by south -- by Southwest, the driller, that California might have passed the statute revoking the right to drill oil completely.

There were many possibilities of terminability in that case, but none of these possibilities occurred and neither did anyone of these possibilities if they existed in this case occur.

Justice Charles E. Whittaker: What would have been your position as to depletion allowance if the contract had been terminated within the 60 days?

Mr. David Berger: It is my position, sir, that with respect to the coal that he mined before termination.

Justice Charles E. Whittaker: He'd get it anyway?

Mr. David Berger: Yes, Your Honor.

I take that position because in this case, the petitioners were the miners.

They took out and complied with the laws relating to permits of the State of Pennsylvania for mining.

They paid the employees, they built roads, they built houses and supply buildings.

They furnished the water.

They furnished the power.

They made an agreement with the United Mine Workers of America and I daresay would come as somewhat of a shock to John L. Lewis to hear, as the Government suggested in this case, that the petitioners here were mere employees.

I don't think there's any question.

Justice Charles E. Whittaker: Well, would not the economic interest of the strippers if they have one, is dependent -- depends on what they may have done to which was now (Inaudible)

Mr. David Berger: I think it is dependent upon two things, Mr. Justice Whittaker.

First, the terms of the grant and secondly, upon what actually happened.

But where you have a conflict if it does exist, and in my mind it does not, then I say that that conflict should be resolved by this Court in terms of what actually happened not what might have happened.

Justice Charles E. Whittaker: If they assume that is wholly assumptious that one does to prevent that of such economic interest (Inaudible) if the contract is terminable here at will or arrived from, then would you not get -- it was not just any given any interest that the contract (Inaudible)

Mr. David Berger: Your Honor, that would depend on some other facts which you have not stated and I would like to explain my answer in this way, sir.

That we must return to the statute.

I think that's a good practice.

And the statute says you're entitled to the depletion allowance if you'll derive gross income from mining.

Now, in your case you would have to tell me so I could properly answer you, who got the permits that is under local law?

Who is the one who complied with the local law?

Who bore all the risks of mining?

Who acted as the entrepreneur, the -- the employer all the way down the line?

And what kind of a right did he get from the owner of the land?

And in this case, he got the right, the exclusive right to mine to exhaustion.

Therefore, I would say he got an economic interest.

Now, may I say another word, Your Honors?

Justice John M. Harlan: What do you feel were the language of the regulation?

Mr. David Berger: To the extent to which it is inconsistent with my position, I say it is incorrect and unsupported by the statute and it's plain unambiguous words.

May I say, Your Honors, that I have studied these cases and I realized that the concept of economic interest and economic advantage is as has been referred to by one of the Justices of this Court, a Gossamer-like concept.

But it is my belief that the cases are not that as difficult as they appear to be, that they really breakdown into three categories.

Category number one is the situation where the taxpayer, who was claiming depletion allowance, is the entrepreneur who actually drills the oil or mines the coal.

Category number two is the -- where the taxpayer does not himself drill the oil or mine the coal but by virtue of a legal relationship to the mineral, maintains control over its production to a certain extent and derives income directly from the oil or coal.

Now, category number three is where the taxpayer has some sort of tenuous connection with the mineral as a result of the production of which he gets some income.

He might or might not.

Now, where a case falls within category number one, there should be no doubt in anyone's mind that that taxpayer is entitled to depletion allowance because he comes plainly within the terms of the statute.

The difficulty has arisen in categories two and three.

When is a case in two and when is it in three?

This Court has given the ultimate determination or a label, if I may use the word, by saying when it allows the depletion allowance, he has an economic interest and when it denies it he has only an economic advantage.

Now, I have concluded that the cases which gave rise to the doctrine of economic advantage in this Court were cases where the person involved did not do the mining, did not do the drilling for oil, but got some kind of income as a result of a tenuous connection for -- and they came from a trilogy of cases decided on the same day by this Court 20 years ago.

And these cases were the Bankline, the Elbe case and the O'Donnell case.

Now, the Bankline case, the taxpayer claimed the depletion allowance was merely a man who bought certain number of barrels of gas.

That's all he did and he claimed that he had the right of depletion allowance.

This Court said he doesn't.

I would say that a man who bought all the coal after it was finished would have no right to the depletion allowance, a coal broker.

In the O'Donnell and the Elbe case, we were dealing with a seller of stock in one case and a seller of land in another where the -- where the seller received the purchase price and in addition, in case there were some net profits, he was to get a share of the net profits.

This Court declared in all of those three cases that he had merely an economic advantage but no economic interest.

Justice John M. Harlan: What about in this case, a strip miner gets a contract to operate the mine for a year.

The mine has a 30-year exhaustion.

Do the strip miner get a depletion allowance?

Mr. David Berger: The Government itself says, yes, on that one.

The internal --

Justice John M. Harlan: Make it six months.

Mr. David Berger: Well, that point is off the policy, sir.

It is arbitrary to say, yes, for one year but, no, for 11 months and 30 days or 29 days.

Justice John M. Harlan: They have been a little more generous in that thing.

Mr. David Berger: Well, I don't think it was.

I think -- I think it was arbitrary, sir.

For example, if you say a year like Mr. -- the Huss has actually produced more in the shorter period of time than Parsons did in a longer period.

And this will depend upon so many factors to mention in my limited time like the coal itself, the kind of equipment.

And I personally know because I come from the coal regions that as a result of the impact of mechanical advancement, the rate of production has increased enormously so that today, you can produce more in one day than you used to be able to produce in a month.

If Your Honors please, I'd like to reserve my remaining time for rebuttal.

Chief Justice Earl Warren: You may.

Mr. Heffron.

Argument of Howard A. Heffron

Mr. Howard A. Heffron: Mr. Chief Justice, may it please the Court.

As we see this case, it comes down to a search for some capital investment that the strippers made in the mineral in place here which would give rise to a right to depletion.

The statute is designed to return to the taxpayer his capital represented by the wasting mineral asset.

The theory being, as Justice Brandeis stated speaking for the Court, that depletion is like depreciation.

The taxpayer has an asset represented by the mineral.

As that asset is converted into cash, a portion of the cash represents a return of his capital.

It would be unfair to tax him on those proceeds without granting to him an offsetting deduction.

So that it comes down to this as we see it.

Did the taxpayer have that kind of ownership interest in the mineral in place which entitles him to say, at least in part, this was my mineral?

And as it is wasted, as it is exhausted, it is unfair to tax me on the proceeds I have obtained in connection with that mineral without granting the deduction.

Now, the statute, insofar as it deals with the question of the parties who are entitled to the depletion deduction, says only the following.

In the case of leases, the deduction shall be equitably apportioned between the lessor and the lessee.

That is the fountainhead of the law on this subject as we have it.

Now, as it is, that section of the statute merely reiterates what this Court had already held before it was even enacted into law.

In Lynch and all work Stevens, this Court stated dealing with the case of a lessee, the lessee is entitled to depletion because the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership is a very real and substantial interest therein, it is property.

And so, we say that is precisely what the statute enacted.

The rule of the taxpayer must show he has a real and substantial interest which is property as represented by a capital investment in the mineral in place.

Now, after the statute was enacted, taxpayers made various claims in contesting each other's rights to the depletion deduction.

Lessors argue that lessees were not entitled to it because under state law, title had not passed to the mineral and title was a material factor.

It was arguments of that type which were the occasion for this Court to formulate the economic interest test.

And what we think the Court was in effect reaching for was a method of formulation which would describe the economic attributes of ownership held by the taxpayer which made it only fair that he receive depletion, although he might not have the particular legal incidence of title which might be required under any particular state law.

Now, the economic interest test, in fact, was stated by this Court in Palmer and Bender, which was a case where precisely that sort of argument was made.

And the economic interest test was restated by this Court time and again in cases dealing with lessees, sublessees, sublessors, assignees.

And the Court said, “If you have an economic interest in the mineral, we are not concerned with the legal incidence of title here.”

Now, as we see it then, the issue in this case is to determine whether the incidence of ownership which the taxpayer can be said to have acquired over the mineral in place, place him in a position similar to that of the lessor or lessee so that it can fairly be stated that the taxpayer has the capital investment in the mineral in place which makes it fair that he be given a return of capital tax-free as represented by the proceeds of the coal.

Now, when we turn to the specific facts in this case, we have a situation of a --

Justice Hugo L. Black: Which case now?

Mr. Howard A. Heffron: I beg your pardon, sir, in these cases --

Justice Hugo L. Black: Yes.

Mr. Howard A. Heffron: -- we have a situation.

Persons are engaged in the business of strip mining.

Their job is to remove coal for the owner.

Their job is then having removed it to turn it over to the owner and to be paid a fixed price for the services which they rendered.

And the taxpayers here assert that that right to do a job, a right which in itself is terminable at will by the other side, a right which contains no control over the mineral itself, which grants no right of disposition over the mineral.

That the rights which the taxpayers acquired under these contracts if they can be termed rights such as to entitle them to depletion.

Now, the question here as we see it is the nature of the interest acquired by the taxpayers.

Now, turning first to the terminable feature of these contracts, we say that that factor in and of itself shows that the taxpayers had nothing to deplete here.

Whatever connection they had with the mineral, since it could be turned off at any time by the owner of the property, they had no real nexus with the mineral in place.

They had no interest in the mineral in place.

They can point to nothing for that reason which can be depleted.

The application of such a test here is substantially similar to the kind of test this Court has applied in dealing with other kinds of transfers because essentially, the taxpayers are arguing here that they are transferees of some kind of an interest in the property, an economic interest.

Now, this Court has said in many other context that the right, the retention of an absolute power to revoke the transaction renders that transaction illusory for tax purposes.

There has been no substantial transfer if the donor may revoke the gift at any time.

There has been no substantial transfer -- transfer -- the transferor entrust, may cancel and revoke the trust at any time.He is still taxed on the income.

He hasn't disposed off the property.

It remains in his gross estate.

And so, we say here that the retention of the absolute power to revoke in effect renders any transfer here illusory.

The taxpayers got nothing.

They got nothing because the other side could always take it back and --

Justice William J. Brennan: Well, that's not true as to the coal, I understand, which actually was stripped.

Mr. Howard A. Heffron: If Your Honor pleases, as to the coal which actually was stripped in the one case, the taxpayers did retain the right to deliver that coal.

However, in the event that that did occur, of course, the taxpayer's rights with respect to the track would have terminated.

At the time the taxpayers --

Justice William J. Brennan: (Voice Overlap) to that -- to that extent of your argument, that would be true only as to the coal remaining in place on the effect of date of the termination, isn't that so?

Anything that had been brought to the surface, they were still entitled to deliver and receive the stipulated compensation.

Mr. Howard A. Heffron: The Parsons case, if Your Honor pleases.

When the power to terminate with -- were exercised, the taxpayers would have the right to take any coal which had actually been uncovered and turn it over to the owner and receive their pay, and in that case, leave the premises.

They would be finished if that right were exercised.

However --

Justice John M. Harlan: Without termination clause here --

Mr. Howard A. Heffron: Well, if Your Honor please, if there had been no termination clause, we think the case would have been a better one for the strippers to argue.

But we say that there are other factors in this case which, nevertheless, militate against the transfer of an interest in the mineral.

Justice John M. Harlan: I understood your question.

Parsons, is that in the record, (Inaudible) under those determination if (Inaudible) has the right to operate the coal, he have troubles himself (Inaudible)

Mr. Howard A. Heffron: If Your Honor pleases, when the -- what that provision meant was that when the stripper had been working on the track and he had removed the overburden on any particular strip, if at that time the power of termination was exercised since he would have had that kind of an outlay in removing the overburden which is the major part of the job, he ought to be able to collect for the coal which he actually uncovered.

It went no more than that.

Justice John M. Harlan: If he worked that strip to exhaustion.

Mr. Howard A. Heffron: That would again depend upon how much overburden he had in fact removed.

Justice John M. Harlan: Well, whatever it was (Inaudible) stripped and laid out that he uncovered the overburden on this courtroom, he operate the coal underneath that presumption.

Mr. Howard A. Heffron: Yes, he could remove that coal.

Justice John M. Harlan: How is that different from a situation where the man has the right to strip the mine out of the cancellation clause, in respect with the (Inaudible)

Mr. Howard A. Heffron: Well, that man knows that he has the right to mine all of the mineral deposit to exhaustion.

It is subject to no one else's unfettered command.

He has the undisputed control over it.

Now, if we examine that the same --

Justice John M. Harlan: Does in the case of this kind of cancellation clause.

Mr. Howard A. Heffron: Well, if Your Honor pleases, as we see it, while the stripper mined, he at no time was assured that he could mine the track to exhaustion.

He was at no time assured that he could mine the mineral deposit to exhaustion.

All he was assured of was that to the extent that he had uncovered any particular segment to that extent, he could conclude and remove the coal.

But insofar as we're talking about the areas, and there are many different mining areas which are involved here covered by the oral agreement, insofar as those mineral deposits are concerned, the stripper at no time had the unrestricted power to remove all of the coal in place.

Justice John M. Harlan: You say that this has to be regarded as an individual contract.

Mr. Howard A. Heffron: We say that is in fact what was done here.

Justice John M. Harlan: If the strip miners protect themselves against cancellation, but to strip the surface at the entire time and he'd be able not to stand in process, the cancellation clause operate for a long time, the exhaustion.

Mr. Howard A. Heffron: As a practical and economic matter, the stripper would be concerned with the ratio of removal of overburden to coal which he found.

And in order to assure that he had an economic operation, he would insist upon removing such coal as he found and derive the revenues from that coal or else, he could never know whether he were removing overburden over a seam of coal which it was uneconomical to remove the overburden from.

He would, as a practical matter, the minute he hit upon a seam of coal which showed that it was of the extent and depth such as to make it economical in fact to remove, he would remove it.

Justice Charles E. Whittaker: Well, as the matter of (Inaudible) the strippers did remove under burden from the (Inaudible) probably, he could hold on to.

Then, under burden (Inaudible) he would have the right to remove the coal.

Mr. Howard A. Heffron: I think as a -- as a theoretical matter, that would undoubtedly be so if we were dealing with a mining area which was so small that within 10 days, the stripper would in fact have removed all of the overburden.

Because if we were dealing with the mining area as is the case here, that within a 10-day period, the stripper could not conceivably have removed any significant portion of the overburden, he of course then would have no right whatever to that vast bulk of the deposit which he would have nothing to do with at all.

Justice Charles E. Whittaker: Does it not seem very well thought out (Inaudible) removing the overburden from the whole thing.

They're not selling the coal because that cost money picked up by (Inaudible)

Mr. Howard A. Heffron: Precisely, sir.

Justice William J. Brennan: Mr. Heffron, as -- as I understand it under each of these contracts, the risk at least to the extent of -- extent of expenses are was entirely the stripper's, isn't it?

If he doesn't find coal, he gets nothing.

Mr. Howard A. Heffron: That is correct.

Justice William J. Brennan: Do you give any weight at all on the issue of economic burden to the fact that he carries that list?

Mr. Howard A. Heffron: Your Honor please, I'd like first to indicate just what type of a risk it was.

These strippers were not in the stereotype picture of the prospector who goes out in the desert with the shovel on his back.

These strippers were dealing with known coal fields.

The coal fields had all been drilled.

They had all been surveyed.

Some portions of them had been deep mined.

In one instance, a portion of it had been strip mined.

Justice William J. Brennan: Well, are you saying then that it in fact, it was impossible not to find coals, the operation started.

Mr. Howard A. Heffron: I think these -- the strippers knew that there was coal here.

In fact in one instance, the stripper said he didn't have to go out on the track and make any inspection himself.

He knew there was coal there.

And the Court in fact found that the risk, if any there was, was minimal, so that this is not the kind of a situation where the risk element is any significant factor.

But in any event, the same type of argument, the same type of formulation has been placed before the Court before in other cases which have been argued, and the Court has answered time and time again that the statute and its purpose was not to reward the risks of mining but rather to permit the taxpayer a tax-free return of his capital because his asset had in fact been exhausted.

And this Court in the Bankline Oil case specifically made that formulation.

We're not here concerned with the risk of mining, we are concerned with a return to the taxpayer of his capital investment in the mineral.

And the issue is whether or not he has acquired such a capital investment in the mineral in place.

Justice William J. Brennan: We are not concerned (Inaudible) and that provision is act of relation to leases.

Mr. Howard A. Heffron: If by that provision, Your Honor is referring to the --

Justice Charles E. Whittaker: The case of leases, the deduction shall be equitably apportioned.

Mr. Howard A. Heffron: Well --

Justice Hugo L. Black: That's not involved here, isn't it?

Mr. Howard A. Heffron: Well, we do not have a lease here.

That is correct.

And we say that because the taxpayers are neither lessees nor holders of any of the substantial attributes of ownership which would place them in a situation substantially similar to lessees but there's no authorization for an award of the depletion deduction to them.

Justice Hugo L. Black: The contention here on either case is why the lease was under that provision.

Mr. Howard A. Heffron: I beg your pardon, sir.

Justice Hugo L. Black: There's no contention here in either case that this should be treated as a lease under that provision.

Mr. Howard A. Heffron: No, sir.

Justice Potter Stewart: If as a matter of practical fact, if this Court should agree with you with your position, wouldn't it be very easy for the parties to just change the labels and terminology in the written agreement and have the -- have the stripper pay a dollar for something that was called a “license subject to cancellation,” dress it up as over a property right, would then in -- by practical fact, should be the same thing?

Mr. Howard A. Heffron: No.

We -- we would say how -- whatever dress we'd put upon it, if one side reserved the absolute power to revoke without cause as was done in these cases, there would be no transfer; that the whole transaction so far as the transfer of an economic interest in the mineral would be illusory.

Justice Potter Stewart: Now under the -- under the regulations, as I understand them, even if one party does have the power to revoke so long as it's -- that -- that there's at least a year is irrevocable relationship provided why this deduction is available, isn't it?

Mr. Howard A. Heffron: Well, the regulations themselves don't deal with this question at all.

The regulations simply repeat the economic interest test that this Court enunciated in precisely the same language stated in the opinion, so that so far as the regulations are concerned, we're still dealing with the judicial gloss that has been placed upon the statute by the decisions of this Court.

Justice Potter Stewart: Where does this one year period?

Mr. Howard A. Heffron: I -- I think counsel is referring to a GCM of the Internal Revenue Service.

Justice Potter Stewart: I see.

Let me ask you one other practical question, Mr. Heffron, if I may.

Mr. Howard A. Heffron: Yes, sir.

Justice Potter Stewart: I can understand of course why it is important to the Government that this issue be decided.

There's been a conflict and confusion in the decisions of the Courts of Appeals and the District Courts.

It's important to the Government that an answer be given to why does the Government press so strongly that the answer you suggest be given, isn't it -- isn't an answer the only thing that the Government is actually interested in?

Mr. Howard A. Heffron: Well, in one sense I think that's true, sir.

But in another sense, we're pressing for an answer which we think is the answer authorized by the statute and by the prior decisions of this Court.

We're pressing for an answer which we think would provide a test which will resolve many of the difficulties which have arisen in the Circuit Courts and in cases now pending.

We think that the answer we request here in essence returns to the framework of the statute itself and the basic purpose of the statute.

The result which the taxpayers press upon the Court here as a result which in effect states that anyone who derives income from the extraction of a mineral shall be entitled to depletion regardless of whether he owns the mineral, regardless of whether he invested in the mineral.

Anyone in fact connected with the production of the mineral itself is entitled to a depletion deduction, and of course in these cases, the proceeds which the taxpayers receive from the owner of the coal lands were in no sense intended to compensate the taxpayers for the wasting of their -- of any asset they held in the coal, they were intended to compensate the taxpayers for the services rendered and the use of their equipment.

Justice Hugo L. Black: What is your test in simple words?

Is it did the regulation?

You think that is a sufficient definition of -- of a boundary?

Mr. Howard A. Heffron: As I said it, if Your Honor please, before, the regulation simply paraphrases almost directly quotes from the language of this Court.

Justice Hugo L. Black: Saying for a test that be definitely what --

Mr. Howard A. Heffron: Oh, not a test which we conceive as different from the test already applied by this Court.

Justice Potter Stewart: As you say, there's a lot of confusion consistently in the Courts of Appeals.

Mr. Howard A. Heffron: Well, it's a test which has done that only because -- only in this context, in the context of the strip mining contract.

It's a test which has been applied, we think, with some degree of success in the other context it has arisen.

And we think it's only because the taxpayers have relied upon certain phrases and picked them out of the opinions of this Court that there's been any difficulty with it.

As we understand this test, and when we said it in the framework of the actual factual problem which was presented to the Court in those cases, it's a test which we think clearly applies in this situation.

I mean, granted, it is a generalized formulation and to the extent that in this area of the law, we deal with any generalized formulation, someone who refrains from examining the particular fact which provoked the generalization, they ran a foul of the basic purpose of the rule.

Justice William J. Brennan: (Inaudible)

Mr. Howard A. Heffron: Well, our suggestion in this case, if Your Honor pleases is to return to the basic test formulated by the statute and in effect to a hold that the words “lessee” in the statute as stated in Palmer and Bender do not mean legal lessee but in effect, one who has the economic incidence of the lessee, the economic ownership that a lessee has.

And we think that if that were the test, it would be a relatively simple matter to apply it in this case.

Justice John M. Harlan: Why hasn't the furnishing of that right obligate a mine, (Inaudible)

Or let me put the question to you another way.

How many -- how many Courts of Appeals cases are there that have a -- have upheld the right to depletion in a situation where there's been no right of termination on the part of the owner of the strip mine whether he was entitled?

Mr. Howard A. Heffron: There have been several.

Justice John M. Harlan: Has there been any differences of view among them on -- in that kind of a situation?

Mr. Howard A. Heffron: Insofar as the right to mine to exhaustion is concerned, there have been no differences of opinion.

Justice John M. Harlan: Yes.

Mr. Howard A. Heffron: And I --

Justice John M. Harlan: Why -- what would you -- when I asked you the question first, you said that you thought that the taxpayer would have an easier case or a more arguable case, but you shied away from saying that he had a case that you'd have to agree with.

Now, why is it that in that kind of a case, the Government would say, non-const there is no economic interest?

Mr. Howard A. Heffron: Well, we think if the -- we think that the right to mine to exhaustion need not necessarily be the automatic test here.

We say that, for example, the lessee has a good deal more than the right to mine to exhaustion; he has the right to dispose of the proceeds of the mining process.

In this case, there was no such right.

The strippers could not dispose of the coal.

They had none of the attributes of ownership over this coal.

So some cases below have placed weight on whether or not the stripper had this right of disposal on the theory that the lessee and the substantial attributes of ownership include more than just the right to mine because that may only be the right to do the job.

It includes the right to dispose of the mineral in place, which is essentially the capital asset which theoretically is being depleted here.

Justice John M. Harlan: Well, he's disposing of it but he's disposing of it to the owner at a fixed price, disposing of it, that's where his income comes from.

What difference does it make to whom it's disposed to as far as economic interest is concerned?

Justice William J. Brennan: As far as (Inaudible) he has no interest that he can sell his right to strip and can't sell to someone else?

Is that what you're talking about?

Mr. Howard A. Heffron: No.

I -- I --

Justice William J. Brennan: You mean the coal itself.

Mr. Howard A. Heffron: Would -- yes.

As -- as I understand it, this discussion is revolving about the coal which has actually been mined.

And as we see it, although the right to mine to exhaustion is a -- would be a substantial element of the case which the stripper would have to make, we say that it goes beyond that.

The lessee has rights over the mineral deposit which go beyond the right to mine it to exhaustion.

He has the right to dispose of the proceeds as he sees fit.

Now, the stripper in this case has no right to dispose of the proceeds as he sees fit.

He has no unfettered control over the mineral deposit.

Justice John M. Harlan: (Voice Overlap) as to why that deprives him that economic interest.

Mr. Howard A. Heffron: I mean, well, it would be one thing if the stripper were given the right to dispose off the mineral, he would then have all the substantial attributes of ownership.

He would be a lessee in effect if he then chose to contract to dispose of the entire contents of the mine to a particular purchaser.

It would be another matter, we think, because then he would have exercised or he would have had the opportunity to exercise that control over the mineral deposit.

Justice John M. Harlan: It would be clearer (Voice Overlap) -- it would be clearer but I thought you were in agreement with the taxpayers here at least to the extent where economic interest is not defined in terms of some legal caption “laborer” as Mr. Justice Brennan called it, but you looked at it from the economic standpoint rather than the legal standpoint, if you choose to call it.

Mr. Howard A. Heffron: Well, we do, if Your Honor pleases, if I may --

Justice John M. Harlan: (Voice Overlap) --

Mr. Howard A. Heffron: Well, then I'll just state it again, we -- we would concede that the right to mine to exhaustion is a substantial part of the case which the taxpayer should make.

And we think that whether or not that element proves dispositive may well depend upon the other facts which are in the case.

That's why I hesitate to concede that automatically and in every case, the right to mine to exhaustion would dispose of the question.

We think it may well depend upon the other facts which are in the particular case.

Justice John M. Harlan: There are no other facts, how would you deal about it?

Mr. Howard A. Heffron: I think if there were no other facts, the -- the taxpayer would have --

Justice John M. Harlan: The right to depletion.

You do know --

Mr. Howard A. Heffron: I think you would probably have the right to depletion.

Justice John M. Harlan: Can I -- can I put this question to you that in the case of a termination lease where the right to work, the strip to exhaustion is the only fact in the case, what difference is there between that case and as far as that strip is concerned, and the case that you just agreed with me now would entitle the taxpayer to a right to depletion?

Mr. Howard A. Heffron: If we're dealing with the case where the strip is the mineral deposit and the taxpayer in fact has the right to mine that strip as the mineral deposit to exhaustion, I -- I would agree with you.

Justice John M. Harlan: You would agree.

Mr. Howard A. Heffron: -- Justice Harlan.

But if we are dealing with a case where the stripper does not have unfettered control over the mineral deposit, and such control as he has is limited to what he can remove from the overburden in which he has removed.

We think that's a different case.

I -- I think if I understand Your Honor's harking back to the question you put a little while ago.

We say in that case, the stripper at no time has unfettered control over the mineral deposit.

Such rights as he does have, is subject to the -- to revocation by the coal company at any time.

Consequently, he cannot point to any portion of this mineral deposit and say, “I have a right to it.”

The best he can do is say, “If I have removed the overburden from this area, the coal company cannot get the benefit of my services for nothing.

They have to pay me for it and then I pull out.”

Chief Justice Earl Warren: And I suppose he doesn't have the right either to -- to determine for himself how much he will uncover before he starts to mine any coal, he'd rather be -- if he didn't bring any coal up for the -- for the coal company and did nothing but uncover the strips so he could exhaust them in the future.

I suppose they'll terminate the contract on him, wouldn't they?

Mr. Howard A. Heffron: I think that's right.

Chief Justice Earl Warren: That's why he wouldn't have -- he wouldn't have control to exhaustion.

Mr. Howard A. Heffron: He could never plan on removing the coal.

Chief Justice Earl Warren: Never plan to -- to go to exhaustion.

Mr. Howard A. Heffron: And in fact, in one of these cases, in the Parsons case, the record shows that the stripper was offered a written contract and the stripper said, “No, I don't want a written contract.

I want an oral contract which is terminable at will so that I can move to more profitable lines of endeavor in road building if they come up.”

So that in this -- in the Parsons case at least, not only do we have the case where the coal company can take it back, we have a case where the stripper didn't want to be tied to the mineral deposit.

He wanted to be free to remove himself.

We think that's another fact which shows the lack of nexus which the stripper had to the mineral deposit.

Justice John M. Harlan: Do I understand your answer to Chief Justice.

Your answer to my difficulty is that you've got to look at this contract as a whole rather than in the particular segments where the right to terminate might not affect the right to work that particular mine to exhaustion.

Is that -- is that what I understand you to say?

Mr. Howard A. Heffron: That -- that's correct.

If the -- if the taxpayers were here contesting the right to depletion on the amount of coal which they had in fact uncovered and as to which the coal company had in fact invoked the right of revocation, the case might be a different case.

Justice Charles E. Whittaker: As in that as a matter of abstract law, does the question of economic interest depend upon the right to terminate at will or is that but one matters in determining the ultimate question of whether they do have an economic interest?

Mr. Howard A. Heffron: Well, the -- the ultimate question, Mr. Justice Whittaker, is phrased in that term.

“Does the stripper have an economic interest in the mineral deposit?”

And one of the -- one of the tests or one of the constituents in that ultimate finding has been stated by this Court as did the taxpayer, acquired by investment, any interest in the mineral in place.

And we say that the right of termination affects a decision on whether the stripper has complied with that requirement of attaining an economic interest.

There's been some question raised in the Huss case as to whether or not in fact, the coal company retained the 30-day right of termination, which is explicitly set forth in four of its written contracts.

And whether it retained the absolute right of termination with no notice, which was explicitly set forth in another of the contract.

That is the same kind of factual contention which these taxpayers made to the District Court and lost.

They made it to the Court of Appeals and they lost.

They made it to the Court of Appeals on rehearing and they lost.

And we think that the finding of fact which has been sustained so many times ought -- ought to set the matter at rest here.

In fact, there was testimony by the coal company that they had very good reason for putting these termination clauses in.

They wanted to protect themselves if the whole operation became uneconomical for any reason.

They wanted to be able to pull out.

Turning to the Southwest case, as we read that decision, the strippers can derive no comfort from it.

The upland owners, we submit, were in an entirely different position vis-a-vis the mineral than the strippers here.

Here, before the agreements were signed, the strippers had no interest whatever in the mineral.

We submit they were the strangers to the lease which this Court referred to in the Southwest case.

The strangers to the lease which this Court said, it was not -- it was not covering by its decision granting depletion to the upland owners.

The upland owners on the other hand, even before they entered into any agreement with the actual operator of the oil wells, had their land in such a position that it was in -- in a sense a proprietary interest in the oil in place by reason of the situation of their land.

So that the Southwest case as we understand it is a case where this Court in effect held that the taxpayers had an interest before they entered the arrangement which was tantamount to an economic interest because their land was so situated with relation to the oil, that their land had a proprietary relationship to the oil.

So that we think in no event can the taxpayers rely upon the Southwest case further in the Southwest case of course, as -- as was already been indicated.

The upland owners were in a real sense indispensable to the production of oil.

Absent the upland owners, there could be no production of oil.

If I may summarize the Government's position here.

As we see this case, the taxpayers have failed to demonstrate that the wasting mineral deposit represents a capital investment of theirs and that is the language which this Court has formulated.

The taxpayer must show that he has acquired by investment an interest in the mineral in place.

Now, we say that in effect means that the taxpayer must convert his capital from one form into another form.

That other form is an interest in the mineral in place because the taxpayer here at no time had unfettered control over the mineral deposit or any substantial portion of it, because he had no right to dispose of the fruits of mining.

For both of those reasons, we submit that he lacked those essential attributes of ownership which can be summed up in the phrase “a capital investment or capital interest in the mineral in place,” and therefore he should be denied reversal.

Chief Justice Earl Warren: What is your position regarding that Article 23 that -- which is the termination clause of the contract?

Is that ambiguous in your opinion so that it cause relentless to -- to establish its meaning, or do you -- do you think that that does express the true will of the parties?

Mr. Howard A. Heffron: We think it expresses the true will of the parties and that the finding of fact of the District Court, which has been sustained so many times, resolves all doubts as to the explicit language.

Rebuttal of David Berger

Mr. David Berger: Mr. Chief Justice --

Chief Justice Earl Warren: Mr. Berger.

Mr. David Berger: -- I say that a finding of fact has not been sustained so many times.

And if Your Honors will read the opinion of the Third Circuit, you will see that the position taken by the majority of the Third Circuit in effect was this whole thing is a question of fact for the trial judge.

A reasonable man could reach different opinions, different results on the same evidence.

And I feel that that was not a correct decision.

I feel that as a matter of law, we were right, we were entitled to it.

That they are winning or losing, the depletion allowance may not be rested or based in the uncontrolled or unreviewed discretion of a trial judge, that if we took Judge Van Dusen, we lose it, but if we got Judge Jackson, we might win it.

Now, secondly, I'm surprised to hear government counsel say that he -- he offers no test when asked by this Court what is a test if my test of mining isn't the test.

On page 32 of the Government's brief they set forth the test.

And it is conceited, and I'm not going to waste my time for rebuttal in reading what they say except to paraphrase it to say.

And as I read, the plain language of page 32, they concede that a stripper may have an economic interest, then they give three situations in anyone of which he will have such an economic interest as to entitle him to depletion allowance.

One, to mine all or a substantial portion of the track.

We had the right to and we did mined all of the track.

Two, to extract a substantial number of tons of the mineral.

We have the right to mine to exhaustion.

We extracted almost a million tons of coal.

Three, to continue stripping operations for a sufficient time so that I can -- he can be certain of being able to remove a substantial amount of coal.

That is in the alternative, t says or three.

We had that right.

Now, even if our right were subject to termination, the law has always protected contractual relationships terminable at will.

If I am buying merchandise from you, sir, and a third-party should interfere with my purchasing of merchandise from you even though I may terminate it myself, that right can be actionable.

That termination can be -- that interference is actionable.

The restatement of torts recognizes that.

Justice John M. Harlan: Well, Mr. Berger, can I ask you this question?Did your -- assuming your contract had a termination clause in it (Inaudible) --

Mr. David Berger: Yes, sir.

Justice John M. Harlan: -- did you have the right to work to exhaustion in the coal that was uncovered?

Mr. David Berger: That quite --

Justice John M. Harlan: Under your contract?

Mr. David Berger: The record is not clear on that, sir, and I have to concede that.

And the reason it isn't is that we always took the position that we were entitled to mine to exhaustion and we did mine to exhaustion.

We never went into that.

If that fact is essential and I'm given an opportunity to prove it, I'll prove it.

I don't know whether -- in whether that was the case because we -- we only mined to exhaustion.

We know this that it is clear in this record that there are over 50,000 tons of coal very frequently stacked up on the surface of the ground.

And as to that coal, it is certainly not the fact.

But we would like --

Justice John M. Harlan: In fact, a very different question as to what you did in practice and what you have in the rights of business, as I understand in respect to that respect, your case is different as in Parsons.

Mr. David Berger: It may -- it may on this record.

I don't know if it does in fact in all candor, sir.

Justice John M. Harlan: Ultimately --

Mr. David Berger: Yes.

Well, that fact was not previously considered to be one of relevance.

I believe that in -- in summary, sir, that the -- as we have pointed out in our brief, page 16, a purpose of a statute is to award the -- where a person who takes the risk of prospecting and this we did very clearly.

There are economic interest in all cases whether we call this a lease or a license or however we label it, is the right to mine.

This we had in exercise.

Thank you, sirs.