Rev. Rul. 87-21

1987-1 C.B. 310, 1987-11 I.R.B. 21.

COAL; RIVERBED DREDGING OPERATIONS; TAXABILITY

Published: March 16, 1987

Section 4121.-Imposition of Tax, 26 CFR 48.121-1: Imposition and rate of tax on coal

  Coal; riverbed dredging operations; taxability. Coal extracted from a riverbed by dredging is subject to the tax imposed by section 4121(a) of the Code at the rate imposed on coal from surface mines.

ISSUE

  X is a corporation engaged in the business of dredging coal from the bottom of rivers. The coal in the river tends to accumulate in certain locations, though it originates from a variety of sources. These sources include losses and spillage from barge and rail transport, spillage at coal loading and unloading facilities, losses from coal company and power plant stockpiles, and natural erosion of coal from mines and cleaning plants. X dredges the coal from the river bottom and, after eliminating the river sand, loads the coal from its floating facility onto barges.

LAW AND ANALYSIS

  Section 4121(a) of the Code imposes a tax on a producer's sale of coal from mines located in the United States at the rate per ton determined under section 4121(b). Section 4121(b) provides that after March 31, 1986, sales of coal are taxable at the rate of $1.10 per ton for coal from underground mines and $.55 per ton for coal from surface mines. In each case, however, the tax is limited to 4.4 percent of the sale price per ton. The tax rates in section 4121(b) are temporary increases. Section 4121(e)(1) provides that, effective with respect to sales after the temporary increase termination date, section 4121(b) is to be applied (A) by substituting '$.50' for '$1.10', (B) by substituting '$.25' for '$.55', and (C) by substituting '2 percent' for '4.4 percent'. The 'temporary increase termination date' may be determined by reference to section 4121(e)(2).

  Section 4121(d) of the Code provides that coal shall be treated as produced from a surface mine if all of the geological matter above the coal being mined is removed before the coal is extracted from the earth. Coal extracted by auger shall be treated as coal from a surface mine. Coal shall be treated as produced from an underground mine if it is not produced from a surface mine.

  Section 48.4121-1(a)(1) of the Manufacturers and Retailers Excise Tax Regulations provides, in part, that for purposes of section 4121 of the Code, the term 'producer' means the person in whom is vested ownership of the coal under state law immediately after the coal is severed from the ground, without regard to the existence of any contractual arrangement from the sale or other disposition of the coal or the payment of any royalties between the producer and third parties. The term includes any person who extracts coal from coal waste refuse piles or from the silt waste product which results from the wet washing (or similar processing) of coal.

  Under section 48.4121(d) of the regulations, coal that is reclaimed from coal waste refuse piles is treated as produced from a surface mine.

  The coal waste refuse or silt waste involved in reclamation operations typically consists of a mixture of coal and extraneous material, such as rock or dirt, that is a byproduct of previous mining or coal cleaning operations. The reclamation of this waste material involves physically removing the waste from its original location at the mine site or cleaning plant to a separation facility where the extraneous material is separated from the coal.

  X's dredging operation is analogous to coal waste reclamation since in the course of this operation X removes dredged material, consisting of a mixture of coal and extraneous substances, from its original location in the riverbed, and

separates the extraneous substances from the coal at a floating separation facility. Since X's dredging operations are analogous to coal waste reclamation operations, and since coal produced from reclamation operations is taxable at the rate prescribed in section 4121 of the Code for coal from surface mines, X's sales of coal are taxable at the rate prescribed for such coal.

HOLDING

  Coal extracted from a riverbed by dredging operations is subject to the excise tax imposed by section 4121(a) of the Code at the rate imposed on coal from surface mines.

Rev. Rul. 87-21, 1987-1 C.B. 310, 1987-11 I.R.B. 21