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Pyramid Coal Corp. v. Commissioner of Internal Revenue.

November 30, 1943


Petition for review of decision of the Tax Court of the United States.

Author: Sparks

Before SPARKS and KERNER, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge.

By this action petitioner seeks to review a decision of the Tax Court of the United States which found it liable for deficiencies in unjust enrichment taxes for its fiscal years ending March 31, 1936 and March 31, 1937, together with a penalty for failure to file a return for the latter year. It found that these taxes and the penalty were due from petitioner under section 510(a)(1) of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Code, ยง 700(a)(1). That Act imposed a tax upon income derived "from the sale of articles with respect to which a Federal excise tax was imposed * * * but not paid which is attributable to shifting to others to any extent the burden of such * * * tax * * * ."

The tax which that court found had been shifted to others by petitioner was imposed by the Bituminous Coal Conservation Act of 1935, 49 Stat. 991, which became effective on November 1, 1935, and was declared unconstitutional by the Supreme Court of the United States, May 18, 1936. It imposed a tax of 1 1/2 per cent of the sales price of the coal which petitioner produced. That tax is referred to as the "Guffey tax," and none of it was paid by petitioner.

Petitioner contends that it did not shift any of such tax, and that the Tax Court's finding is not supported either by evidence or by legal presumption. The following facts are supported by uncontradicted evidence. Petitioner is an Illinois corporation engaged in the business of mining and selling bituminous coal. It was incorporated in 1928, and until January 1, 1935, it operated but a single mine known as the Pyramid. On that date it acquired two additional mines known as the Danville and the Pyott mines. In the taxable years here involved it operated the three mines.

Petitioner's sales of coal were of two general types, those under long-term contracts, and those under short-term contracts, or those referred to as "spot market" sales. The long-term contracts were with the Missouri Pacific Railroad Company, Chicago Great Western Railroad Company, Terminal Railroad Association of St. Louis, and Universal Coal Washing Company. The contract with the Missouri Pacific Railroad Company was made in 1928 and provided for purchase by the railroad of between 4,000,000 and 6,000,000 tons of coal to be delivered in as nearly equal monthly installments as possible during a period of ten years. The contract with the Chicago Great Western Railroad Company was entered into in 1929 and provided for the purchase of between 1100 and 1600 tons of coal per day.The contracts with the Terminal Railroad and the Universal Coal Washing Company were entered into in the respective years of 1934 and 1935. All of the long-term contracts provided for definite prices for the coal which could be varied only in the event of changes in labor costs. Most of the coal sold under the long-term contracts was produced at the Pyramid mine, with a small amount coming from the Pyott mine. None of the coal sold under the long-term contracts was produced at the Danville mine.

On October 1, 1935, petitioner, as a member of the Illinois Coal Pperators' Association, entered into a new contract with the United Mine Workers of America providing for substantial wage increases for its mine workers. On that date the sales prices of coal under contract with the railroads were increased five cents a ton, and petitioner paid such higher wages beginning October 1, 1935, throughout the taxable years.

Petitioner negotiated with the Universal Coal Washing Company for an increase in price of four cents per ton, due to the wage scale increase. This agreement became effective March 1, 1936.

Approximately 72% of petitioner's total production during the fiscal year ending March 31, 1936, and approximately 63% thereof during the period from April 1, 1936, to May 18, 1936, was sold to the three railroads and the Universal Coal Washing Company. The remainder was sold on the "spot market" or under short-term contracts, through petitioner's sales agency, Binkley Coal Company. That company, in addition to acting as exclusive sales representative for petitioner, was also sales agent for other producers. While Binkley Coal Company fixed the prices of coal sold by petitioner on the "spot market" and under short-term contracts, those prices were controlled by petitioner.

The Bituminous Coal Conservation Act of 1935 became effective November 1, 1935. Under that Act, Binkley Coal Company, on behalf of petitioner and all other producers represented by it, sought to pass the amount of this tax on to all purchasers on the "spot market," and added the excise tax in invoicing the purchasers. Binkley Coal Company was forced to drop this procedure after about ten days because customers refused to pay the tax, and it found that competitors were not adding the tax to the price of the coal. Hence it made credit adjustments to all vendees covering the amount of the tax. After that time there was no sale made of petitioner's coal which included the tax as a part of the price, and customers were advised that they would not be charged the excise tax.

Petitioner sought to collect the tax from the three railroads with which it had longterm contracts. They refused to pay the tax on the ground that their contracts did not provide for a price change because of that tax. Within a very short time petitioner was forced to discontinue this practice and subsequently issued credit memoranda in the full amount of the excise tax so added to the invoices.

Coals from the Pyramid and Pyott mines were in the same classification. They were both sold under long-term and short-term contracts and on the "spot market." Coal from the Danville mine had a lower BTU content than that produced at the Pyramid and Pyott mines and was classified differently. It was sold at a higher price per ton than the coal at the other mines because that mine was so located that the coal could be sold in the local or peddler market to domestic consumers.The selling price of "spot market" coal in the Midwestern area customarily advanced in winter months because of the seasonal demand. It was during the winter months, for the most part, that the Guffey excise tax was in effect. Normally, the winter price of the coal produced at the Danville mine exceeded socalled summer prices of the coal there produced by from 12 cents to 20 cents per ton.

The productive capacity of the mines in the Middle West, Illinois, Indiana and Western Kentucky, exceeded the demand for coal in the markets served by those mines in 1935 and 1936. During that time prices were fixed to meet ...

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