1984 U.S. Tax Ct. LEXIS 43">*43
Petitioner engaged in sand and gravel dredging at two locations on the Missouri River pursuant to nonexclusive licenses which granted no interest in the minerals in place.
83 T.C. 193">*194 Respondent determined deficiencies in petitioner's Federal income taxes for the fiscal years ending March 31, 1975, and March 31, 1976, in the amounts of $ 3,876.36 and $ 4,478.07, respectively. The issue for decision is whether petitioner held an economic interest in the sand deposits it dredged from the Missouri1984 U.S. Tax Ct. LEXIS 43">*45 River within the meaning of
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioner is a corporation organized under the laws of the State of Missouri, with its principal place of business located in Columbia, MO, at the time its petition was filed in this case. At all relevant times, petitioner's sole shareholder was Harold E. Johnson.
Petitioner is engaged in the business of extracting sand and gravel from the Missouri River at Boonville and Rocheport, MO. 1 The Missouri River is classified as navigable under section 10 of the Rivers and Harbors Act of 1899, 30 Stat. 1151,
While State law determines title to the beds of navigable rivers, dredging operations must be conducted pursuant to permits issued by the Department of the Army, Corps of 83 T.C. 193">*195 Engineers. During the period from 1950 to 1972, one of petitioner's two predecessors in interest 2 operated under a renewable permit issued by the Corps of Engineers which authorized it to dredge in the Missouri River between river miles 191 and 206 near petitioner's Boonville dock. Said permit was transferred to petitioner on June 1, 1972, and was periodically renewed throughout the years in issue. The other of petitioner's predecessor corporations operated pursuant to a Corps of Engineers permit which allowed it to dredge in several locations in the Missouri River, including the area between river miles 168 and 205 near1984 U.S. Tax Ct. LEXIS 43">*47 petitioner's Rocheport dock. This permit was issued to the Columbia Sand Co. which was a registered fictitious name of petitioner's sole shareholder, Harold E. Johnson, and after September 1972, became a registered fictitious name of petitioner. Throughout the years in issue, petitioner apparently operated under the continuing authority of its predecessor's permits since the Corps of Engineers never challenged petitioner's right to dredge in the vicinity of its Rocheport facility. In April 1975, the Corps of Engineers issued a permit in petitioner's name to dredge river miles 168 and 206 in the vicinity of petitioner's Rocheport facility.
1984 U.S. Tax Ct. LEXIS 43">*48 The permits issued by the Corps of Engineers prescribe the areas in which petitioner may dredge sand and gravel from the bed of the Missouri River. The permits do not convey any property rights either in real estate or materials, nor any exclusive privileges. The permits may also be suspended, modified, or revoked at any time by authority of the Secretary of the Army if it is determined that revocation is in the public interest. Petitioner has not and does not pay any royalty to the United States with respect to the permits issued by the Corps of Engineers, nor petitioner pay any other fee or royalty to the State of Missouri with respect to its dredging operations.
During the years in issue, petitioner owned and operated one suction-type dredge boat which it used in its dredging operations at both Boonville and Rocheport. Petitioner periodically 83 T.C. 193">*196 navigated its dredging equipment the 10 miles between Boonville and Rocheport in order to dredge in the vicinity of either facility depending upon the water conditions and demand for sand in each area. Generally, petitioner dredged sand at each location as needed or until its stockpiles were filled to capacity. At each site, 1984 U.S. Tax Ct. LEXIS 43">*49 the dredge pumped sand and gravel from the river bed, screened it to obtain material of the desired sizes, and deposited it in barges which were moved by towboats to petitioner's docks. At Rocheport, a clamshell crane moved the sand from the barges to a conveyor which ran the material behind the levee to a stockpile area. At Boonville, a clamshell crane moved sand from the barges directly to petitioner's stockpile area.
Petitioner is a commercial sand-dredging operator, 3 which requires that it provide sand of specific size and quality to meet the specifications established by purchasers of petitioner's products. For petitioner's primary market, the ready-mix concrete manufacturers, petitioner had to locate sand deposits which were low in lignite, an undesirable impurity which rendered many sand deposits unusable for the ready-mix concrete market. To avoid lignite, it is necessary to selectively dredge sand deposits. Sand deposits located in swifter water tend to contain less lignite, but it is not possible to consistently find lignite-free sand in the same location.
1984 U.S. Tax Ct. LEXIS 43">*50 The sand and gravel unloaded at petitioner's Rocheport facility was dredged from the stretch of the Missouri River extending from the facility upriver approximately three-quarters of a mile. At Boonville, petitioner primarily dredged 83 T.C. 193">*197 deposits located within 200 yards upstream of its unloading facility. Because it is expensive and difficult to push loaded barges upriver, petitioner rarely, if ever, dredged deposits downstream from either facility.
The factors which are significant in determining whether a site is suitable for unloading and marketing sand include: the cost of developing a site in relation to the anticipated market for sand; access to the market via suitable roads and highways; adequate stockpile areas; lack of interference from river traffic in the dredging areas that would compromise the safety of the equipment; the distance that loaded barges must be towed from deposits to the unloading sites; the location, height, and type of river control structures; and the general topographical features of the land adjacent to the river. Based on these factors, there are no permanent sites suitable for profitable dredging operations adjacent to the deposits in which1984 U.S. Tax Ct. LEXIS 43">*51 petitioner dredges in either the Rocheport or Boonville areas. 4
On its income tax returns for fiscal years ending March 31, 1975, and March 31, 1976, petitioner claimed deductions of $ 9,391.35 and $ 10,262.02, respectively, for percentage depletion of sand and gravel. Respondent disallowed these deductions in their entirety on the ground that petitioner did not have an 1984 U.S. Tax Ct. LEXIS 43">*52 economic interest in the sand and gravel removed from the bed of the Missouri River during the years in issue.
OPINION
We must decide whether petitioner has an economic interest within the meaning of
Petitioner argues that it controlled the only land from which it was economically feasible to dredge in the vicinity of its Rocheport and Boonville facilities, and that under the case law, it had economic control of, and therefore, an economic 83 T.C. 193">*198 interest in, the sand and gravel adjacent to its riparian properties. Respondent maintains that petitioner's dredging, pursuant to permits issued by the Corps of Engineers which did not give the petitioner any legal rights in the deposits, is not entitled to percentage depletion because petitioner lacked an economic interest in the deposits. Furthermore, respondent maintains that petitioner's economic control argument is erroneous and misstates the test for an economic interest.
Depletion deductions are allowed on the theory that mineral deposits are wasting assets and that the extraction of minerals gradually exhausts the capital investment in the mineral deposit. 6 The deduction is designed to permit a recoupment of the owner's capital investment in the minerals so that when the minerals are exhausted, the owner's capital is unimpaired.
Depletion deductions are allowed only to the owner of an "economic interest" in the mineral deposits. The test for determining whether a taxpayer possesses an economic interest is whether the taxpayer has (1) acquired by investment any interest in the mineral in place, and (2) whether the taxpayer looks to the income derived from the extraction of the mineral for a return of his investment.
We do not think that petitioner acquired by investment any interest in the minerals in place within the meaning of the regulations and the case law. Petitioner only acquired a nonexclusive license to dredge materials from the river. Such a license does not convey "any interest" in the sand and gravel "in1984 U.S. Tax Ct. LEXIS 43">*56 place" but rather transfers a mere economic or pecuniary advantage derived from production. See
In
83 T.C. 193">*200 The taxpayer in
In
We believe that the key to the
In the instant case, petitioner does not have exclusive physical and economic control of the sand and gravel adjacent1984 U.S. Tax Ct. LEXIS 43">*61 to its riparian properties. Under these circumstances, it is possible that another operator could dredge materials from the deposits adjacent to petitioner's facilities with impunity.
For example, a contract dredger could dredge in the area adjacent to petitioner's properties, using land which is unsuited for a permanent facility but which is sufficient for the temporary storing of sand and gravel. Petitioner could not prevent the contract dredger from dredging in its deposits, since the right to dredge sand and gravel from the bed of the Missouri River is a public right, nor could petitioner obtain a royalty or other compensation for the sand and gravel extracted. Since contract dredgers typically extract huge quantities of sand and gravel, up to 2 million tons, the deposits which petitioner dredges could be substantially depleted by one of these contract dredgers and petitioner would be entirely unable to prohibit such operation or obtain any compensation. The economic reality is that without physical control over the deposits, petitioner could lose its sole source of the material to 83 T.C. 193">*202 which it must look for income to a competing dredger who could remove a majority of1984 U.S. Tax Ct. LEXIS 43">*62 the material without compensation to petitioner.
In general, we believe that only where a taxpayer has made a contribution of indispensable property in a situation where it has exclusive physical and economic control over sand and gravel deposits in the river adjacent to such property, so as to ensure that it alone will share in the proceeds from production of the adjacent minerals, can the taxpayer be considered to have an economic interest in the adjacent mineral property. Because petitioner did not have the requisite physical control over the sand and gravel in the riverbed adjacent to its riparian properties, it did not have an economic interest in such sand and gravel deposits, and therefore, it is not entitled to the claimed depletion deductions. 10
1984 U.S. Tax Ct. LEXIS 43">*63 To reflect the foregoing,
1. During the years in issue, in addition to income derived from sand sales, petitioner received income from the unloading of salt at its Boonville facility and from hauling charges.↩
2. Petitioner was created by the reorganization of petitioner's predecessor, the Missouri River Sand & Gravel Co., Inc., into two separate entities, one of which operated a quarry and the other, petitioner, which continued to dredge sand and gravel near Boonville. Subsequently, the assets of the Columbia Sand Co., an entity owned by Harold E. Johnson, were transferred to petitioner giving it the facility at Rocheport, MO. Title to the land at the Rocheport facility was held by Harold E. Johnson who leased it to petitioner throughout the years in issue.↩
3. Throughout the years in issue, contract dredgers also operated on the Missouri River. Contract dredgers typically extract huge quantities of material, up to 2 million tons, which is used as fill for large construction projects such as levees or highways. The material extracted for large projects consists of a natural mix of sand and gravel containing all but the finest silt, and it requires little or no processing. Contract dredgers do not need to stockpile materials because shortly after the sand and gravel is extracted, it is hauled from the river to the construction site. Commercial dredgers, on the other hand, require an area in which they can stockpile materials of various sizes to ensure adequate supplies are available for their customers.
The following chart shows the amounts of dredged sand unloaded at each of petitioner's facilities, and the amounts of petitioner's income attributable to the sale of said sand during the taxable years in issue:
Boonville facility | Rocheport facility | |||
Dredged sand unloaded | Dredged sand unloaded | |||
FYE Mar. 31 | (in tons) | Sand sales | (in tons) | Sand sales |
1975 | 106,753 | $ 101,082 | 66,806 | $ 86,913 |
1976 | 72,412 | 94,405 | 81,689 | 110,835 |
4. During periods of high water, when the Boonville facility became flooded, petitioner's predecessor corporation occasionally used the Spring Hollow wharf to unload sand and gravel. The Spring Hollow wharf is located approximately nine-tenths of a mile upriver from petitioner's Boonville facility. While this facility was acceptable as a temporary unloading dock at high water, it is not suitable for a permanent unloading facility for a commercial dredger, such as petitioner's, because there is insufficient storage area, the river is shallow, and the sand has to be hauled up a steep hill and through a subdivision in order to get to the highway.↩
5. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue.↩
6. At trial, the parties did not dispute that the sand and gravel that petitioner dredged in the vicinity of its Rocheport and Boonville facilities is a wasting asset.↩
7. The taxpayer also operated pursuant to a permit, analogous to the Corps of Engineers permit in
8. We also noted that the taxpayer's investment was not all in depreciable equipment; the State surrendered to the taxpayer its interest in the sand and gravel that was removable by extraction; the sand and gravel following its removal belonged solely to the taxpayer; and the taxpayer had to look solely to the proceeds of its sales of sand and gravel for a return of its investment. See
9. Pursuant to State law, the taxpayer had the exclusive right to extract minerals within 1,500 feet of its operations.↩
10. See