Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-27

1979-1 C.B. 217

Section 613

IRS Headnote

Depletion; sale of coal; separately stated excise tax. A separately stated "excise tax" that is received by a mine operator from the sale of coal to compensate the mine operator for excise tax it must pay under the Black Lung Benefits Act of 1977 is additional income includible in the operator's gross income from the property for purposes of the percentage depletion allowance.

Full Text

Rev. Rul. 79-27

Is the separately stated "excise tax" received by the mine operator on the sale of coal includible in gross income from the property for purposes of the percentage depletion allowance?

FACTS

The taxpayer is a mining company engaged in the extraction and sale of coal from coal lands it owns in fee.

The Black Lung Benefits Act of 1977, Pub. L. 95-227, 1978-1 C.B. 494, imposes an excise tax on the sale of coal to finance benefits for certain disabled victims of black lung disease by adding section 4121 to the Internal Revenue Code of 1954. The excise tax applies to all coal (except lignite) mined in the United States that is sold or used after March 31, 1978. For coal mined from underground mines, the tax is either 50 cents a ton of coal sold or 2 percent of the price at which the coal is sold, whichever is lower. For coal mined from surface mines, the tax is either 25 cents a ton of coal sold or 2 percent of the sales price at which the coal is sold, whichever is lower. The coal mine operators, not the purchasers, are liable for the tax.

The taxpayer produced and sold coal from its underground mine during the months of January, February, and March of 1978 at an invoice price of $24.00 per ton. The coal produced and sold during April, May, and June was invoiced at $24.00 plus an excise tax of $.48 per ton. The coal produced and sold during the balance of the year was invoiced at $26.00 plus an excise tax of $.50 per ton.

The coal was sold prior to delivery and after application of only processes considered as mining under section 613 of the Code.

LAW AND ANALYSIS

The applicable sections of the Code and Income Tax Regulations are section 61, with respect to recognition of income, section 613, with respect to gross income from the property and percentage depletion, and section 4121, with respect to the subject excise tax on coal.

Section 61 of the Code provides that, unless otherwise excluded by law, gross income means gross income from whatever source derived.

Section 613(a) of the Code provides that the allowance of depletion shall be a percentage of the gross income from the property. Section 1.613-4 of the regulations provides that the term "gross income from the property" means "gross income from mining" and is the amount of income that is attributable to extraction of ores or minerals from the ground and the application of mining processes, including mining transportation. The depletion allowance is limited to 50 percent of the taxable income from the property. The taxable income from the property is defined in section 1.613-5 as "gross income from the property" less all allowable deductions (excluding a deduction for depletion) attributable to mining processes (the mineral property) with respect to which depletion is claimed.

The basic question is whether the amount separately stated as "excise tax" on the sale invoice should be recognized as income when received by the operator under section 61 of the Code and, if so, whether such income qualifies as "gross income from the property" for purposes of section 613.

The Black Lung Benefit Act of 1977, by adding section 4121 of the Code, imposed an excise tax on coal payable by the coal mine operator. This tax liability is that of the coal mine operator and may not be assessed on the purchaser of the coal. When the operator increases the total amount to be paid by the purchaser by an amount equivalent to the excise tax, such additional amount paid must be included in the gross income of the operator under section 61.

Since the amount invoiced as excise tax is additional income to the mine operator, it becomes necessary to determine whether that income is of the same character as the income invoiced as the price of the coal. The income realized from the sale of the coal is wholly dependent upon extraction of the coal from the ground and the application of allowable mining processes. Under sections 611 and 613 of the Code and the regulations thereunder, such income qualifies as gross income from the property. The amount designated excise tax is also realized on the sale of the coal and is in fact an addition to the price of the coal. That amount is realized only on the sale of the coal and is wholly dependent upon the extraction of the coal from the ground and the application of allowable mining processes.

Rev. Rul. 75-182, 1975-1 C.B. 176, discusses a situation in which the operator pays the state an ad valorem and gross production tax for which the net profits interest owner was liable. The revenue ruling recognized that the taxes were a liability of the net profits owner and when paid by another constituted gross income from the property to such owner. As income to the net profits owner it was not includible in the gross income from the property of the operator.

Rev. Rul. 72-165, 1972-1 C.B. 177, also recognizes that the payment of taxes by the lessee that are the liability of the lessor result in additional royalty income to the lessor that qualifies as either gross income from the property for depletion purposes or as ordinary rental income not subject to depletion.

Therefore, in the instant case, the excise tax is a liability of the producer and, when paid, should not reduce its gross income from the property. The tax is a cost or expense of producing the income actually realized and is to be subtracted from gross income from the property in computing the taxable income limitation for percentage depletion.

HOLDING

The separately stated "excise tax" that is received by the mine operator on the sale of coal is additional income includible in gross income from the property for purposes of the percentage depletion allowance.